Market Players Urge Government to Keep Equity Trading Taxes Lower Than Derivatives
Financial market participants have made a direct appeal to India’s Finance Minister Nirmala Sitharaman ahead of the upcoming budget. They are asking the government to maintain lower Securities Transaction Tax rates for cash equity trading compared to derivatives trading. This request comes as part of several key recommendations aimed at supporting domestic investors and strengthening India’s capital markets.
Understanding the Securities Transaction Tax Debate
The Securities Transaction Tax is a small tax levied on every trade executed on Indian stock exchanges. It applies to both buying and selling of securities. Currently, STT rates differ between cash market transactions and derivatives trading. Market participants want this differential to continue, with cash equity trades remaining more lightly taxed.
Industry experts argue that keeping STT lower for cash equities supports long-term investing. They say it encourages actual share ownership rather than short-term speculative trading. Derivatives trading typically involves more leverage and shorter time horizons. Maintaining lower taxes on cash market transactions would reward investors who take direct ownership positions in companies.
Proposed Changes to Share Buyback Taxation
Market participants have also proposed significant changes to how share buybacks are taxed. Currently, companies pay a 20% tax on the entire amount used for share buybacks. The new proposal suggests taxing only the profits generated through these buybacks rather than the full amount.
This change could make share buybacks more attractive for Indian companies. A share buyback occurs when a company repurchases its own shares from the marketplace. This reduces the number of outstanding shares and can increase the value of remaining shares. Under the current system, companies might be hesitant to conduct buybacks due to the high tax burden. The proposed system would align more closely with how other corporate actions are taxed.
Aligning Dividend Tax Rates for Domestic and NRI Investors
Another key recommendation involves aligning tax rates on short-term dividends. Currently, Non-Resident Indian investors enjoy lower tax rates on dividends compared to domestic investors. Market participants want this disparity eliminated.
They argue that all Indian investors should receive equal tax treatment regardless of their residential status. This would create a more level playing field in the markets. Dividend income represents an important source of returns for many investors. Equal tax treatment would ensure domestic investors aren’t disadvantaged compared to their NRI counterparts.
These proposals come at a crucial time for Indian markets. The government has been working to make India an attractive investment destination. Market participants believe these tax changes would support that goal. They could encourage more domestic participation in equity markets while maintaining India’s competitive position globally.
The Finance Ministry will consider these recommendations alongside other budget proposals. The final decision will be revealed when the Finance Minister presents the full budget to Parliament. Market watchers will be closely monitoring whether any of these suggestions are implemented.
