Tuesday, February 10, 2009

Ministry favours STT removal

The finance ministry has drafted a proposal to remove the securities transaction tax (STT), a levy that P Chidambaramm, when he headed the ministry, steadfastly refused to lift.

Pranab Mukherjee, now finance minister, has sent the proposal to the prime minister’s office for opinion and consent.

P Chidambaram imposed the levy four years ago and rejected persistent demands thereafter for its removal.

STT at 0.125 per cent is levied on all transactions of securities traded on stock exchanges. The levy on derivative trading is 0.017 per cent.

Even if the PMO agrees, the mode of the withdrawal of the levy is a question mark. Normally, finance ministers do not change direct tax rates in an interim budget. The UPA government is presenting such a budget this time.

A former senior official of the ministry, however, does not see why the minister cannot change a direct tax provision. “Nothing prevents a finance minister from making tax related announcements even in an interim budget in an election year,” he told Financial Chronicle.

One way Mukherjee can scrap STT is to do so as a “temporary measure” that may be re-visited when the full budget is presented in June – July by the new government.

The ministry reasons that the withdrawal will breathe some life into the moribund stock market. But whether it can revive the market is a moot point. Second, in the present market, trading is down, and hence, so is the collection of STT. One argument in the ministry is that since the collections are down in any case, it is worthwhile to sacrifice the revenue and see if it helps.

If the withdrawal does take place, it will mark a reversal of Chidambaram’s policy on the levy. He has repeatedly refused to withdraw this levy as well as the commodities transaction tax and the cash transaction tax despite demands from within the ruling UPA and outside.

As long as the market was booming, STT yielded good money for the government. The boom over, collections have declined. In the first 10 months of 2008-09, the collections were Rs 4,815 crore, compared with Rs 6,793 crore in the same period of the previous year. The drop was 29.13 per cent.

In 2004-05, the first year of the levy, the collections were only Rs 589 crore, but increased to Rs 2,513 crore in 2005-06 and to Rs 4,648 crore in 2006-07. In 2007-08, the figure was Rs 8,577 crore.

Amitabh Chakrabarthy, president for equity at Religare Capital believes the scrapping of the tax will benefit retail investors. “STT is similar to other taxes and if it is removed, it is likely to have a positive impact,” he said.

R K Gupta, managing director of Taurus Mutual Fund, however, does not see any impact of the move. “As a knee jerk reaction, the market may go up by a few points. But the move would not have any material impact on the overall market sentiment,” he said.

(Source: http://www.mydigitalfc.com/government-finance/ministry-favours-stt-removal-782)

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