Broking firms want the securities transaction tax (STT) to be rationalised, in Budget 2008. STT is being levied at the rate of 0.125 per cent for capital market transactions and 0.017 per cent in the derivatives segment.

Under the current tax structure, buyers and sellers have to shell out Rs 100 each on delivery-based trades worth Rs 100,000, while the seller has to pay Rs 20 on non-delivery trades amounting to Rs 100,000.

The government gets monthly revenues of Rs 200 crore (Rs 2 billion) on an average. Almost 65 per cent comes from non-delivery based transactions, according to brokers.

Brokers maintain that cost of transaction has to go down, which would lead to an increase in volumes. Currently, the trading cost in India is among the highest in the world.

There should also be clarity on how the stock market gains are taxed. Nilesh Shah, CEO, Ambit Capital, said, "We need clarity on whether stock market gains will be taxed as capital gains (short term and long term capital gains) or business income. Since there is a lot of confusion, the finance minister should address the issue."

The applicability of STT on arbitrage trades is unclear too. These trades, which constitute a very large component of daily volumes and provide liquidity to the markets, carry the same STT rates as client trades.

There is a lack of clarity regarding STT credit between the arbitrageur and brokerage houses. There is also confusion regarding the applicability collection of service tax from sub-brokers. Under current regulations, the registered sub-brokers do not collect brokerage fees from investors.

However, this is a mandatory requirement for registering under the service tax regime. The anomaly needs to be addressed, said Asit C Mehta in a pre-budget note.