Government hikes securities transaction tax on futures, options contracts

Union Finance Minister Nirmala Sitharaman speaks in Lok Sabha on March 24, 2023. Photo: Sansad TV via ANI

The Government has raised the Securities Transaction Tax (STT) on futures and options contracts in the stock market by 25% from April 1, 2023, a move that may push some traders to offshore markets and dent trading volumes on the bourses.

Options contracts will now attract 0.0625% STT, from 0.05% earlier, and futures contracts will attract a levy of 0.0125%, up from 0.01%, officials said after the Finance Bill was cleared by the Lok Sabha on Friday.

“While the proposed increase in STT will shore up revenues of the government to a certain extent, the main idea behind this could be to discourage the excessive trade in the futures and options (F&O) segment where a large number of retail traders end up losing money, as per a recent SEBI study,” Deepak Jasani, head of retail research at HDFC Securities told  The Hindu.

“An incidental effect of this could be shifting the F&O trades to SGX, GIFT City and other locations that do not attract such taxes for participants who have access to them,” he added.

The measure will have the intended effect of curbing excessive F&O trades only in flat or range-bound markets as when markets are volatile, traders will hope to offset the higher tax by higher payoffs, Mr. Jasani explained.

“The STT hike is an untimely step, particularly in a time when the markets are experiencing turmoil,” said PHDCCI president Saket Dalmia, adding that this will have some impact on market sentiments as well as trading volumes.

The increase in STT will especially impact high frequency traders who work with thinner spreads in the futures and options segment, said Rajesh Gandhi, partner at Deloitte India. Moreover, foreign portfolio investors or FPIs may be affected as they don’t get a deduction for STT while computing their capital gains on derivatives.

“In the past, such raising of taxes had a temporary minimal impact of F&O volumes. For more effective curbs on volumes, SEBI or stock exchanges may have to link volumes and open interest in the futures and options market with the disclosed income or wealth of the participants,” the HDFC Securities official said.