The changes proposed to income tax rules related to the securities transaction tax (STT) in the Union Budget 2008 have put an end to the flourishing trade in STT.
The Budget proposal aims to plug a loophole currently being exploited by top stock brokers to get away by paying less tax.
The Union Budget has proposed to treat STT like any other deductible expenditure against business income.
For the past several years, big arbitrageur and jobbers, who generated huge STT, sold it to stock broking firms, which were mainly into delivery-based business, at 1 to 2 per cent commission depending on the STT amount at the end of the financial year.
Arbitrageur are those who purchase and sell the same security at the same time in different markets to take advantage of a price difference between the two separate markets, mainly the cash and derivatives markets.
A jobber trades in a particular stock, mainly in the cash market. They thrive on short-term volatility and treat income from such transactions as business income.
Since the STT paid currently is allowed as a rebate against tax liability under Section 88E of the Income Tax Act, if income from securities on which the tax is levied is included under the head 'profits and gains of business and profession'.
These stock brokers who purchase STT from jobbers and arbitrageurs often get away by paying at least 50 to 60 per cent less tax on their business income.
Earlier, brokerage houses used jobbers and arbitrageur to trade on broking firms' proprietary account books. These trades were done on profit-sharing plus the costs. So there were no brokerage charges. But it generated STT.
Brokerage houses set the STT off against their business income after they bought the position and made marginal profits.
To close this loophole, the Budget has now proposed that STT paid will be treated like any other deductible expenditure against business income.
For example: Assume an income of Rs 100 and Rs 10 as STT. At 30 per cent corporate tax, in the earlier case, Rs 10 was deducted from 30 and the total tax outgo was Rs 20.
Now, according to the new proposal, STT of Rs 10 will be deducted from the income of Rs 100 and the net income of Rs 90 will be taxed at 30 per cent, resulting in a higher tax outgo of Rs 30.
However, this practice of generating huge STT by arbitrageur and jobbers would now be curtailed.
Market experts are of the view that trading in STT had resulted into generation of artificial liquidity on the stock bourses, which also played a role in pushing up share prices to unrealistic levels and creating a "bubble-like" situation.
At the market peak of January 8, volumes in the cash market topped Rs 37,301 crore (Rs 11,867 crore on BSE and Rs 25,434 crore on NSE) and another over Rs 85,000 crore on the National Stock Exchange's derivatives segment.
While it is likely that volumes may remain weak in the next financial year, market experts say that it would not affect the overall market.
