The Union Interim Budget 2024 has garnered significant focus, being the last budget presentation of the current government. Over the past five years, the government has introduced numerous economic reforms, with a notable increase in Goods and Services Tax (GST) collections. The discussion on abolishing the Security Transaction Tax (STT) has become a key point of consideration. Investment Information and Credit Rating Agency ( ICRA ) analysis indicates a longstanding market demand for the removal of STT. If implemented, this move is expected to attract more investors to participate in the domestic equity markets.
Introduced in 2004, the Security Transaction Tax is a levy imposed on the buying and selling of securities listed on Indian stock exchanges. It is formulated as a direct tax targeting transactions within the securities market. The STT is calculated as a percentage of the transaction value and is applicable to both buyers and sellers.
Advocates for the elimination of the Security Transaction Tax contend that it could invigorate trading activity and improve market liquidity. This transaction-based tax imposes a cost on every trade, potentially dissuading investors. Detractors argue that the STT may distort trading behaviour and contribute to decreased market efficiency.
The anticipated outcome of removing the STT includes a potential increase in trading volumes. Investors, especially high-frequency traders, may be attracted by the cost reduction, leading to heightened participation in the market. This surge in trading could result in deeper liquidity pools and enhanced price discovery mechanisms
The elimination of the STT is expected to have a positive impact on market liquidity. Lower transaction costs might encourage market participants to engage more actively in buying and selling, fostering a more liquid market environment. Improved liquidity could contribute to better price efficiency by narrowing bid-ask spreads.
The perception of a more cost-effective and efficient market following the removal of the STT could elevate investor sentiment. Both domestic and foreign investors might view the Indian market more favourably, potentially attracting increased capital flows. This, in turn, could have positive implications for overall market health.
Although the removal of the STT may result in a short-term revenue loss for the government, proponents argue that the potential stimulation of economic activity and increased market participation could offset these losses in the long run. Policymakers may need to explore alternative revenue streams or tax structures to compensate for any immediate shortfall.
The possibility of eliminating the Security Transaction Tax in Budget 2024 has sparked conversations in financial circles. A thorough impact analysis indicates that while there could be initial revenue hurdles, the potential advantages, such as heightened trading volumes, enhanced liquidity, and improved investor sentiment, might foster a more dynamic and robust stock market. Policymakers must deliberate the advantages and disadvantages prudently before deciding on a measure that could potentially reshape the dynamics of India’s financial markets.
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