Why he needs to relook at turnover tax – before the mood gets worse

For starters, the announcement of a 15-basis point turnover tax caused the Sensex to dip over a hundred points during the FM’s speech, but it recovered smartly on the realisation that taxes would be payable only on purchases; which is an effective tax on two-way transactions of 7.5 basis points.

Add to this a 10 per cent short-term capital gains tax (down from 30 per cent) and lack of clarity on the tax on speculative transactions, it was a recipe for a further fall in prices.

Hence, it is no wonder that investors were in no mood to focus on other measures announced in the budget. When details of the Finance Bill became available a few hours later, the debt market simply shut down and trading in equity derivatives market also seem set to dry up when the markets reopen on Friday.

A reading of Chapter 7 on Securities Transactions makes it clear that it intends to include all of them, including equity, debt, mutual fund units and derivatives trading for the purposes of levying turnover tax. The calculation of turnover tax on Futures and Options trading is explained in some detail but needs clarification.

NDTV broadcast a Finance Ministry clarification that turnover tax on equity will only be applicable to delivery-based trades. This would cover only around 20 per cent of the total daily turnover. Can this be true? . In any case, NDTV’s announcement was retracted by another channel.

Turnover tax at the same rate on debt trades (government securities and bonds) is also bizarre, when it is well-known that the market works on wafer-thin spreads. Again, there was a government clarification that the turnover tax will not apply to trades on the NDS (Negotiated Dealing System).

But nearly 80 per cent of the trading in the debt market happens on the Wholesale Debt Market of stock exchanges and it will all shift to NDS if this clarification was true. Surely, this government cannot intentionally kill the business of bourses through directed taxation measures.

There is similar confusion on mutual funds. Fund managers say all units traded on the stock exchanges will attract turnover tax but not the others. This would be unfair, especially to Exchange Traded Funds.

Couldn’t the government have avoided the turnover tax confusion with better understanding instead of listening to one segment of the market? Fortunately, the FM said he is open to suggestions regarding the turnover tax. We will know on Friday.

The FM said there were indications that investors were returning to the primary market. He was referring to February-March when six PSUs raised over Rs 15,000 crore. If the market does not improve over the coming weeks, the fate of IPOs, including NTPC and TCS, could be jeopardised and also the FM’s plan to raise Rs 4,000 crore through disinvestments.

The market had such high expectations from Chidambaram that the disappointment is all the more acute making them ignore the rest of his speech.