Members of the Securities and Exchange Board of India have suggested a phased reduction of the securities transaction tax, as part of a package of measures to develop the capital markets that was discussed with Finance Minister Pranab Mukherjee last week.
Removing STT is considered necessary to improve retail participation in the capital markets by reducing transaction costs, sources close to the development said.
"This is a good time to reduce the STT since the market holds good prospects for investment by retail investors," a source privy to the proposal said.
Stock market brokers have been seeking the removal of STT ever since it was introduced in the 2004-05 Union Budget. It is a tax imposed on the sale and purchase of securities, which can be shares, derivatives or units of mutual funds traded on a recognised stock exchange. At present, the STT rate is 0.125 per cent of the total volume of the transaction.
Officials said a reduction or phase-out of the tax might not affect the government's revenue collections significantly because it already levies short-term and long-term capital gains tax on almost all transactions.
They also said the regulator had proposed that the losses incurred in currency derivatives be treated as business losses and not speculative losses, as is the case of equity derivatives.
If the move goes through, any investor could either write off such losses against business profit, which may or may not accrue from market dealings, or amortise it over time during the normal course of business. Alternatively, the investor can take advantage of tax rebates. At present, currency derivative losses are treated as speculative loss and can be used to set off only speculative gains.
Sebi has also suggested that the investments by retail and institutional investors in real estate mutual funds should be given tax benefits for the development of the sector and the fund. A real estate mutual fund scheme is a mutual fund investing directly or indirectly in property.
Similarly, for the development of the mutual funds as an investment category, it was suggested that provident funds and pension funds be given tax benefits to invest in mutual fund units.
The move has been suggested because pension funds and provident funds have large corpuses and tax benefits would encourage funds to flow into mutual funds.
