Union Budget 2020-2021 expectations: Commodity market participants want FM to end double taxation

In its recommendation letter to the Finance Ministry for the Union Budget 2020-2021, the Commodity Participants Association of India (CPAI) has suggested steps for growth of the Indian securities markets. The representative body of Indian commodity exchanges and its participants said it wants the government to remove the double taxation levied on commodity traders in form of Commodity Transaction Tax (CTT) and Securities Transaction Tax (STT) in order to boost trading volumes.

The cost of executing a transaction in India in various asset classes is 4 to 19 times the cost of executing a comparable transaction in the U.S., China, and Singapore due to high incidence of STT and CTT, leading to steep fall in volumes.

In a presentation made to the ministry, CPAI mentioned, “People assessed under business income are paying nearly 65 per cent to 85 per cent tax because of double taxation of STT/CTT plus normal income tax. To promote the development of the Indian securities market, we request STT and CTT should be removed, as Long-Term Capital Gains (LTCG) has been reintroduced and business tax is there at full rates.”

According to the World Bank’s Report, India’s turnover to market capitalization ratio has dropped by 43 per cent from 101 in 2004 to 58 in 2018. It is measured as total traded value of all shares in a year divided by Average Market Capitalization of the entire market in that year.

However, BRICS nations – South Africa, Brazil and China have shown tremendous growth. The fall was more severe after FY2007-08 when the section 88E was withdrawn and STT was started being treated as expense, instead of tax

Country-wise turnover to market-cap ratio

The market participants attribute STT as a cause of this drop. “This has been caused by STT and its treatment as an expense and not towards tax paid u/s 88E,” said CPAI.

According to the CPAI research, data from NSE and BSE validate the World Bank revelations of decline in turnover ratio. See the following table:

The table shows market turnover in last 11 years was 4.99 per cent CAGR, whereas inflation rose to 117 per cent (7.28 per cent CAGR) – the data suggests that volumes have actually de-grown. Market capitalization rose 194% (10% CAGR), while turnover hardly rose 4.99 per cent, leading to 43 per cent fall in market-cap ratio, World Bank reported. Above data is recorded when the market was most bullish, if 2017-18 and 2018-19 is to be ignored, trend worsens to negative.

Why removal of STT, CTT is a win-win situation

All commodity participants and all equity market participants assessed under business income pay heavy CTT & STT upfront, irrespective of profit or loss, and then pay full normal tax at 25.1 per cent (companies) or 34 per cent (firms/LLPs/individuals), leading to effective total tax rates between 60 per cent to 75 per cent. “These sectors are already paying full Direct Income

Tax at slab rates on profits and indirect taxes GST on manufacturing, sales, brokerage and exchange charges,” the association added.

STT was brought in 2004 in lieu of zero Long Term Capital Gains Tax but these benefits were available only to people classified as “investors” and assessed under Capital Gains. People under business income got no such benefits.

STT is calculated based on turnover, irrespective of profit or loss. If an investor buys and sells after considerable time i.e. trading is not frequent, STT payable is negligible. However, market makers in order to provide market liquidity, have to trade in and out very frequently. It is ironical that though their margins are the least, their STT liability is huge, and, in addition, they have to pay income tax.

Due to the huge STT liability as well as tax liability, these market makers have gone out of the market. Consequently, market liquidity and depth have shrunk, bid-ask gap has widened, and impact cost has increased.

The association, in its letter, also pointed out that the treatment of CTT as expense instead of tax has caused commodity derivative volume to fall 60 per cent from FY12-13 to FY18-19. Thus, CPAI suggested that if the removal of double taxation is not possible then “STT and CTT should be treated towards tax paid u/s 88E and not as expense.”

“Or, if STT and CTT stay, they should be reduced drastically and their only fair treatment is as a presumptive direct tax; levied upfront for easy chargeability, zero cost of collection and zero leakage, but applied towards normal tax liability at 25.1/34 per cent. If tax still payable at slab rates after applying STT and CTT, it will be paid. Collect higher of normal tax and STT/CTT, not normal tax plus STT/ CTT.”

According to the CPAI, these measures will lead to a win-win situation with zero revenue loss mitigating some of the sector challenges:

• Increase in trading volumes will increase STT and CTT collection
• Job creation in financial sector
• Bringing back of volumes to domestic market, making it liquid and robust
• Saving of foreign exchange on brokerage and margin money sent abroad
• Increased collection of GST on financial services
• 88E benefit can be taken only by entities under business income which will continue to pay tax at full slab rates and cannot be used by exempt entities or those claiming capital gain or having inadequate business profit.