A government-appointed panel has recommended abolition of the securities transaction tax (STT) in equity derivatives.
The standing council on international competitiveness of the Indian financial sector also suggested doing away with the stamp duty on cash-settled products such as index derivatives.
After the Special Investigative Team (SIT) on undisclosed money noted any investor wanting to invest through participatory notes could invest afresh as a foreign portfolio investor (FPI), the council said it wanted regulatory clarifications on these instruments, through which unregistered investors invest in Indian markets.
It has also suggested the government take measures to internationalise the rupee on the lines of the Chinese renminbi and remove uncertainty about availing of treaty benefits under the proposed General Anti-Avoidance Rules (GAAR) on taxes.
The finance ministry has asked the public to give suggestions on the council's report by October 6.
The council was constituted in 2013 under the chairmanship of the economic affairs secretary. It also comprises the chief economic advisor, financial sector experts and economists.
The report said since STT and stamp duty add to transaction costs in equity derivatives, “STT should be removed. Stamp duty should not be applicable to cash-settled products such as index derivatives, as there is no delivery of the underling (product) taking place.”
STT, announced by then Finance Minister P Chidambaram in the first Budget of the earlier government, is now levied on all sale transactions on futures & options.
It is 0.01 per cent of the traded price of futures and 0.017 per cent on options premiums. A 0.125 per cent STT is payable on the settlement price by the buyer of an option that is exercised.
If STT is paid, there is no long-term capital gains tax but if it is not paid, the latter is levied at 10 per cent.
“In India, the levy of STT is used to determine the applicable rate of capital gains tax, with transactions charged to STT attracting a lower rate of capital gains tax. In addition, exchange transactions on which STT is paid are deemed non-speculative and can avail greater tax set-offs. Since STT is not levied on the entire currency forward and options segment, these transactions may be liable to a higher rate of capital gains tax, and may be deemed as speculative for the purpose of availing tax set-off," the report said.
In the aftermath of the Chinese central bank devaluing its currency, many prominent voices in India, including the Reserve Bank of India (RBI), have called for internationalisation of the rupee and sought to differentiate it from capital account convertibility.
Internationalisation refers to a state where exporters from other countries agree to take payment in rupees and where the currency risks in international borrowings are borne by lenders rather than borrowers in India.
According to RBI, countries that can borrow in their own currency are less susceptible to international crises.
“Consider a time-bound plan for internationalisation of the rupee, in line with the plans of the Chinese government for internationalisation of the renminbi,” says the report, listing it as a priority for the government and the financial authorities over the longer term.
On the controversial GAAR, announced in 2012 by then finance minister Pranab Mukherjee and delayed by Arun Jaitley in his 2015-16 budget, the report stated: “The proposed GAAR...offers insufficient guidance on availing treaty benefits even for existing categories of FIIs (foreign institutional investors).”
It wanted certainty over these aspects. Among the other proposals, the report calls for creation of a working group for common clearing among exchange-traded products, equity, equity derivatives and currency derivatives, removal of regulatory restrictions on domestic FIs participation in equity derivatives, allowing foreign entities with commodity exposure to participate in Indian commodity derivatives, and moving to residence-based taxation over the longer term.