Securities Transaction Tax: Traders/ SEBI, Love Hate Relationship.

What’s the big deal with STT, the World is not falling as yet.

Regulators and regulated are like husband and wife, you got to live together and the love hate relationship will persist. Wife will prevail in all likelihood and no prizes for guessing who’s playing the wife in the securities traders/ SEBI face off on STT.

Securities Transaction Tax (STT) is a small component of tax on each buy and sells securities transaction in the markets. Traders hate taxes as they too much like other investors wish to capture absolute after tax gains. It’s natural for them to cry hoarse over any new tax proposal. They’ve made a beeline of excuses and hectic lobbying to get STT out of the way in the Direct Tax Code. For the regulators and MOF, STT is just another device to mop up revenue from a profitable transaction. Plus thanks to PC, STT had a very successful dry run in the last two fiscal years.

Traders say STT hurt efficiency in the markets,( sure they should label everything that hurts traders profits as a trigger for market inefficiency ), the regulators and tax authorities say when UK can do it why can’t we. Both have a point, but I feel STT is not so bad after all. Sure it brings down absolute return by a few bips, but if it contributes to the tax kitty without hurting market efficiency traders should not try to fake it.

As responsible citizens (traders and responsible, I must be kidding!) we should stop treating discussions on DTC as a “trumpet” which anyone can blow at will and get away with it. Having studied STT implementation in other international markets, I don’t see it as a monster. Traders should get used to it and let regulators have their way on this one. My suggestion to traders: Bargain hard on things which matter more, think tax credits for capital gains reinvested.

'Back of the Envelope' Calculations

Indian GDP Estimates Regressed (back of the envelope calculations)

Estimated for the next 2-5 years horizon

India’s GDP’s Growth Estimate:

= 7.5 % 

+ .5 (Direct Tax Code) 

+ .5 (GST Implementation) 

+ .5 (Deregulation of Oil)

Explanation

Indian GDP (an independent variable) can be estimated by a multiple regression model based on three dependent variables – Direct Tax Code, GST Implementation and Deregulation of Oil. The intercept is taken to be 7.5 (present GDP growth rate under normal conditions), slope is estimated to be .05 for all three dependent variable is a very general manner (just to highlight the level of significance the independent variable have on the dependent variable - GDP growth rate).

Parameters of Independent Variables 

(defined – remember, its back of the envelope calculation – without any sound research to support the hypothesis)

Direct Tax Code              
= 1 (If Implemented)
                                      
= 0 (If Not Implemented)
                                        
= -1 (If corruption index increases)

GST Implementation       
= 1 (If Implemented)

                                        
= 0 (If not implemented)

                                        
= -1 (If fiscal consolidation not initiated in the next one year)

Deregulation of oil            
= 1 (If recommendations accepted)

                                        
= -1 (If not accepted, in the next one year)

                                        
= -2 (If oil prices cross USD 100/ per barrel)

Will the FM bare it all ?

Sum scans FM's mind ahead of his budget speech.

There’s something in the air and in the stock market which is not normal. This is especially true, when the budget is approaching. Market insiders do manage information in bits and pieces from their “moles” in the ministry and try to benefit from it. There is no budget rally, so I’m expecting a major roll back of fiscal incentives. Also since there is no interim fuel price hike, I foresee a moderated version of market price mechanism for fuel pricing in the budget. Diesel car owners in particular are on the radar, and they can expect a tequila shot from the FM. He would test the waters and not really go for a firm measure, maybe by giving a feeler of the market pricing mechanism scheme this time and leaving the bigger and more comprehensive implementation to a future budget. Still I’m sure government is firm footed to roll back part financing of my long drive with my date. With a heft subsidy on petrol I sure am enjoying longer and crisper drives with my girls (of course they are partly financed by the FM, No doubt why the girls love him so much).

I’m fond of this FM and his negotiating skills, especially in not yielding ground to the opposite parties on the negotiating table. He’s proved to be a hard negotiator with the states on GST implementation and I see some moderated steps in this direction. He’s also tested the market feedback on Direct Tax Code, so I foresee some positive news and a time frame defined for its implementation.

I’m expecting FM to act like Bipashu Basu on the 26th. While he will stop short of baring it all, expect him to leave little for imagination, and in the process grab everyone’s fancy.