Stock Exchanges play a very important role in the economy of a country – helping to raise capital for businesses, mobilising savings for investment, creating investment opportunities, assisting the government to raise funds for various development projects, etc. It is aptly said “the stock exchange is the barometer of the economy”.
For the proper and efficient functioning of the stock exchanges, apart from investors, various other types of players like speculators, jobbers, traders, hedgers and arbitrageurs, etc. are not only necessary but obligatory. They are referred to as market participants and each of them plays a specific role in the stock market. While speculators and jobbers provide liquidity as well as volume to the market, hedgers provide depth to the market. Traders help in volume and price discovery whereas arbitrageurs fine-tune prices by correcting price abnormalities. Investors usually invest and hold shares for a comparatively longer period of time.
Currently, the stock market is in a pathetic situation. Markets have become stagnant and trade in a narrow range. Sometimes, on getting news of some event, the market becomes highly volatile and individual stocks show very erratic movements which is due to the lack of depth in the market. The stagnancy in the market is the result of lack of many of market participants like traders, jobbers as well as speculators, who have either deserted the market or are unwilling to initiate trades due to excessive transaction costs. Even arbitrageurs are finding it difficult to use any opportunity, since the costs of transaction are greater than the arbitrage difference. The combined effect of all these is that the investors, especially small investors, are unable to get proper prices to buy/sell their investments, which in turn has resulted in increased impact costs for them.
Earlier, when the transaction costs were not so high, there was room for every market participant to function in the market and trade without restraint of prohibitive costs. However, with the introduction of the Securities Transaction Tax (STT), the costs have escalated to such a level that it has become difficult for the market participants to survive. They desist from entering into transactions due to entry level tax (STT, which is levied at the time of transaction) and thus, overall market liquidity, volume and depth have been impacted adversely.
It was announced in the budget speech that the STT is introduced to avoid the differential tax treatment meted out to capital gains. So, only those investors (actually, bigheads like promoters, FIIs, etc.) whose income from share transactions is taxed as “Capital Gains” are benefited by the imposition of STT with favourable tax treatment whereas, a majority of the market participants like speculators, jobbers, traders, hedgers, arbitrageurs who have income from share transactions which is taxable as “Business Income”, under the head “Profits and Gains of Business or Profession” are left high and dry without any tax benefit on such income, despite the transactions entered into by them also bear the charge of STT.
Let us understand the above with the help of an example, when two identical transactions in shares are executed – one by an investor and another by other market participant, say, a jobber. At first stage, both of them will be charged STT on the transactions executed. However, the income of the investor from that transaction will be exempt from tax thereafter, whereas, the income of the jobber will be taxed again at regular rates. Thus, the market participants have been subjected to double taxation and meted out a stepmotherly treatment under the STT regime. If the favourable treatment is granted only to “Capital Gains” income, then only those transactions pertaining to the income taxable under the head “Capital Gains” should have been subjected to the STT and all other transactions should have been exempted from the STT. Doing otherwise not only impacts the market participants adversely, but also violates “principle of natural justice” and “law of equity”.
Although initially, some relief was granted in the form of tax rebate, the same was discontinued without assigning any reasons whatsoever. Ultimately, the new scheme of taxation on securities transactions has miserably failed to bring win-win situation for all. It has only helped the FIIs, promoters and to an extent, a small class of investors at the cost of all other market participants, who are also equally important for the functioning of the stock market. Slowly and steadily, market participants are drifting away from the stock market which in the long run, has impaired the proper functioning of the stock markets.
To remedy the situation and help the market participants survive, it is suggested to grant proper tax treatment to the market participants, keeping in view the legal principles of natural justice and equity. This can be achieved by segregating the stock market transactions into “taxable transactions” and “exempt transactions” based on whether the order is a “client type/Institution ID” or “Trd category” (i.e trading category). Alternatively, the rebate allowed earlier u/s. 88 E may be restored.
This will ensure that there is no undue high trading costs to the market participants.
