Zerodha’s Nithin Kamath explains why ‘increase in F&O STT may not lead to higher collections’

By admin On Mar 27, 2023

Zerodha CEO Nithin Kamath on Monday weighed on the ongoing debate over the impact of the increase in rate of securities transaction tax (STT) to be levied on sale of options as well as futures and said the move might “result in lower trading volumes”.

“The 25% increase in F&O STT will further move volumes from futures to options. The actual impact wouldn’t be much because over 80% of the volumes come from options & STT is on premium, not on contract value as it is in futures. It is good that the impact will not be as much on options. But a vibrant capital market needs activity across futures and options. They both solve for different needs of traders, speculators, arbitrageurs, & hedgers,” Kamath said in a Twitter thread.

In the Finance Bill 2023, passed by the Lok Sabha on Friday, the Securities Transaction Tax on options is proposed to be increased to 0.0625 per cent from 0.05 per cent and on futures contracts to 0.0125 from 0.01 per cent.

Under the new rules, option traders will have to pay Rs 6,250 for every Rs 1 crore worth of turnover as against Rs 5,000 that is being paid currently, which translates into a hike of around 25%. Also, traders will now have to pay STT of Rs 1,250 on Rs 1 crore of turnover while selling futures.

It is good that the impact will not be as much on options. But a vibrant capital market needs activity across futures and options. They both solve for different needs of traders, speculators, arbitrageurs, & hedgers. 2/6

— Nithin Kamath (@Nithin0dha) March 27, 2023

Kamath further said that for traders to exist and do well, “taxation must be conducive”.

“People think traders, the kinds who trade F&O, don’t add value to the capital markets. The truth is the exact opposite. Without traders, it would be impossible for an exchange to exist in its current form, where investors can buy and sell securities with minimal impact costs. For traders to exist and do well, taxation must be conducive. Over the year, STT, stamp duty, and GST add up to Rs 25k crores. This is separate from taxes paid on profits. By the way, the brokerage & exchange industry revenues are probably another Rs 25k crores.” tweeted Kamath.

Kamath further said “an additional transaction tax could result in lower trading volumes in an environment like this”, referring to the impact of tight macro economic conditions, which is being felt on equity markets across the globe, apart from the banking turmoil being witnessed in Western countries. India’s market capitalisation has dipped below $3 trillion for the first time in nine months, primarily due to persistent selling pressure caused by the instability of banks in the US and Europe, reported Moneycontrol on Monday. India’s market capitalisation currently stands at $2.99 trillion, a level last seen on June 23, 2022.

“For the same trading volumes as last year, the increase in STT would mean an additional Rs 2k crores if market activity remained at the same levels. But given that new account openings have dropped & active accounts plateaued, volumes will likely drop next year. It may sound counterintuitive, but an additional transaction tax could result in lower trading volumes in an environment like this. STT collections could be lower than if STT wasn’t increased. So an increase in STT may not lead to higher collections if that is the intent,” tweeted Kamath.

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