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Securities transaction tax (or STT in short) is that tax which levied by the government during both the sale and purchase on all the equity, shares, stocks, derivatives, equity-oriented mutual funds etc.
Securities transaction tax was introduced in the year 2004 in the Union Budget by the then Finance Minister Mr. P Chidambaram. It was aimed to abolish tax on long-term capital gains and reducing short-term capital gains tax rate on transactions in securities. It was also aimed at foreign institutional investors (FIIs) for collecting the taxes from them. It even expected to make the Indian financial markets less volatile and more efficient.
But in spite of all these positivity, the STT rates have been revived many times over the years. According to me, the Union Budget should remove the securities transaction tax, in order to boost the sentiments of the investor. Because of the STT there is a weak investment activity in the market and in order to ensure adequate liquidity in the system, STT on equity transactions needs to be significantly reduced and withdrawn for derivative transaction.
The Indian Stock Market have suffered great downstream once STT was imposed both in the volumes of cash and derivative segment. STT has made the equity segment less viable and lucrative for the investors to invest and so they have shifted to the commodity segment, where no such tax is applicable. As an intraday investor who trade in derivatives and other stocks and equity funds, earn smaller profits at greater volumes and frequencies and STT as part of their profit is significant. So if STT would be removed they would be encouraged to invest more.
Lastly, I would like to add that if the rates of the STT have been reduced so many times, so why Indian Government can’t totally removes this STT, so that this would bring the liquidity in the market and make the market more healthy and stable. Yeah, this cannot be removed at one go. So the government should find a way by weighing its cause of removing and then slowly and slowly reducing it and then finally removing it.
(This entry is part of our FE MASTERMIND contest. The views expressed in this article are personal and not that of the newspaper.)