The government has increased the Securities Transaction Tax (STT) on on-exchange futures and options contracts by 25% from April 1, 2023, a move that could push some traders into offshore markets and hurt trading volumes on exchanges.
Options contracts will now attract 0.0625% STT, up from 0.05% previously, and futures contracts will attract a premium of 0.0125%, up from 0.01%, officials said after the finance law was approved by the Lok Sabha on Friday had been.
“While the proposed STT increase will support government revenue to some extent, the main idea behind it may be to curb excessive trading in the futures and options (F&O) segment, where a large number of retail traders are losing money, such as emerges from a recent SEBI study,” Deepak Jasani, head of retail research at HDFC Securities, told The Hindu.
“A side effect of this could be the shift of F&O trading to SGX, GIFT City and other locations that do not impose such taxes on participants who have access to them,” he added.
The move will have the intended effect of curbing excessive F&O trading only in flat or range bound markets, as in volatile markets traders will hope to offset the higher tax with higher payouts, explained Mr Jasani.
“The STT hike is an inopportune move, especially at a time when markets are experiencing turmoil,” said PHDCCI President Saket Dalmia, adding that it will have some impact on market sentiment as well as trading volume.
The surge in STT will particularly impact high-frequency traders operating with tighter spreads in futures and options, said Rajesh Gandhi, Partner at Deloitte India. In addition, foreign portfolio investors or FPIs may be affected as they do not receive a deduction for STT when calculating their capital gains on derivatives.
“Historically, such tax hikes have temporarily had minimal impact on F&O volume. To cap volume more effectively, SEBI or exchanges may need to link volume and open positions in the futures and options market to participants’ disclosed income or assets,” the HDFC Securities official said.
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