Tightrope walk

The money involved is huge. If the same tax rates continue, the stock markets alone will pay Rs 2,700 crore to the government coffers. If you add the tax from mutual fund units and bonds, the figure will almost double. Market players have never paid this kind of tax to the government.

Day traders, arbitrageurs and jobbers—the worst hit—are back in business after the initial protests. The benchmark Sensex has also made a comeback and rose by 63 points on Friday as traders resumed their purchases anticipating a change in the tax rates and revival of monsoon.

What’s next?

Chidambaram imposed a flat tax of 0.15 per cent on all listed shares and bonds. Now, if a day trader—who operates on small margins—buys 100 shares of Reliance and makes a small profit, he would have to shell out the entire profit as tax. And they account for 60 per cent of the total business.

After the meeting with the Finance Minister, the broking community expects the government to come out with a differential tax rate for various players. They expect three slabs of 0.15 per cent, 0.015 per cent and 0.0015 per cent. They argue that the 0.15 per cent can be imposed on delivery-based deals. In short, all foreign investors, local funds and long-term investors will have to pay a higher tax.

According to a source who participated in the meeting with the Finance Minister, the 0.015 per cent tax can be levied on arbitrageurs (who make money by playing in the price differences on different exchanges). And the lowest rate of 0.0015 could be made applicable for day traders who do speculative business.

But this differential tax rate is part of the market’s wish list. The FM could take a different approach. For example, a flat reduction from 0.15 per cent to 0.08-0.11 per cent is another possibility.

‘‘This rate (0.11 per cent) is still high. We are looking for a steep cut,’’ says R Maniar, a day trader.’ Bond market dealers are also lobbying for a withdrawal of the proposed tax. They are expecting a drastic reduction or total withdrawal of the tax on bond trades. ‘‘Such a high tax (0.15 per cent) doesn’t make sense in the bond market. The sooner the government removes the tax the better for everyone,” said a dealer with a foreign bank.

The revenue gap

The government will have to rework the tax proposals in such a way that the budget arithmetic doesn’t go haywire. A major reduction in the turnover tax means Chidambaram will have to find other means to fill the gap. If sources are to be believed, Chidambaram may bring sales also under the turnover tax net. His earlier proposal was restricted to purchases alone. “Whether he will do it on sales or not remains to be seen. This can also be challenged by many market dealers. Nobody would like to pay tax while buying and selling the same shares. It will be a kind of double taxation,” says Pawan Dharnidharka, a BSE dealer.

Dalal Street dealers say as long as the tax remains, the paper work will increase. But they admit it was a clever move by the FM to bring day traders and arbitrageurs under the tax net.

Over to Chidambaram.