The Finance Ministry is likely to reduce Securities Transaction Tax (STT) on equity trade in the forthcoming Budget in a bid to boost the capital market despite pressure to improve revenue collection. The ministry, however, may not revisit the issue of Commodities Transaction Tax (CTT), which was aborted in 2009 after protests by industry, sources said, adding that the government is keen to go ahead with the broader policy of reducing the cost of financial transactions.
Industry associations, in their pre-Budget consultations with Finance Minister Pranab Mukherjee, have pleaded for maintaining status quo on tax rates to balance the need for promoting growth without sacrificing revenue.
Although the issue of imposing taxes on financial transactions has been raised in several international fora, India is not in favour of the idea. It has been argued that the Reserve Bank appropriates banking funds through the Cash Reserve Ratio (CRR), the portion of deposits which the banks are required to park with the central bank.
While the CRR, which was lowered by 0.5 percentage points recently by the RBI, stands at 5.5 per cent, the Securities Transaction Tax (STT) is levied at 0.125 per cent on the buyer and seller in equities transaction.
The stock exchanges and representatives of the broking community have been demanding the removal or reduction of STT to give a boost to capital markets by reducing transaction costs.
With regard to CTT, sources said the government may not re-introduce the levy, which was withdrawn after protest from commodity exchanges.
The government had in 2009 proposed a CTT of 0.017 per cent on commodities derivatives trade, but did not implement the levy. It was argued that such a tax is not levied by any country with an active commodities future market.
The government is facing financial problems and the fiscal deficit for the current fiscal is likely to exceed the estimate of 4.6 per cent of the Gross Domestic Product (GDP).
At a time when the government is hard-pressed for funds because of reasons like rising commodity prices in the international market and global uncertainties, it would be a tough choice to fore go the over Rs 7,000 crore which it collects from STT.