The Budget proposes a host of changes that will affect both stock and commodity market investors. While equity trading will become a little less taxing, market experts are opposing the proposed commodity transaction tax.
Investing in stocks is set to become less costly with Finance Minister P Chidambaram proposing a change in the securities transaction tax, or STT, rate. He has recommended a cut in STT on equity futures from 0.017 per cent to 0.01 per cent. This will bring down the transaction cost from Rs 17 per lakh to Rs 10 per lakh.
Market experts have mixed views on the cut. Sandeep Nanda, chief investment officer, Bharti AXA Life Insurance, says, "From the equity market perspective, the reduction in STT should boost sentiment."
Vivek Gupta, research head, CapitalVia Global Research, says, "The STT deduction declared in the Union Budget will not have any major impact on stock investors." There is no change in STT for those investing directly in the markets as STT has not been changed for delivery-based and cash transactions."
There is good news for investors in mutual funds (MFs) and exchange-traded funds (ETFs). The finance minister has suggested a cut in redemption fee in case of MFs and ETFs from 0.25 per cent to 0.001 per cent. The STT for sale on exchanges is proposed to be cut from 0.1 per cent to 0.001 per cent.
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This means the STT has been reduced to Re 1 from Rs 250 per lakh on redemption of ETFs/MFs from the fund house and to Re 1 from Rs 100 per lakh on redemption on exchanges.
As anticipated, the Budget reintroduced a tax on transaction of non-agricultural commodities on exchanges in order to facilitate a more open and transparent trading process. The commodity transaction tax (CTT) was first proposed in the 2008 Budget but withdrawn in 2009.
The government has proposed to introduce CTT on non-agricultural commodities futures contracts at the same rate as on equity futures, that is, 0.01 per cent of the trade value. In simple terms, the CTT for every Rs 1 crore trade will be Rs 1,000.
Experts say this will hit small investors. For example, if an investor trades (buys and sells) in 1 kg gold contract on the MCX, his turnover will be Rs 59.2 lakh (at Rs 29,600 per 10 gm). He will have to pay Rs 592 CTT for this transaction apart from regular brokerage and taxes, which will affect his profits.
R Venkataraman, managing director, India Infoline, says, "The direct impact of CTT will be on volumes and liquidity. Hence, transaction costs for traders will increase along with the impact cost. Investors could be affected by lack of liquidity in the system."
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Chowda Reddy, senior analyst, agri commodities, JRG Wealth Management, seconds Venkataraman and says, "The introduction of CTT will increase transaction costs and impact participation of retail investors, who normally trade for the short term. Commodity trade volumes are also likely to be affected."
Gold, silver, crude oil, copper, natural gas, nickel, lead, zinc and aluminum are the most actively-traded futures contracts on exchanges.