Mistry,
who chaired the committee on making Mumbai an International
Financial Centre (MIFC), said STT was hurting the Indian
capital market, especially the derivatives market. He said STT
should be completely withdrawn, a view also put forth strongly
in the MIFC report.
When
asked what would be an appropriate alternate way of taxing the
financial sector, he said financial services providers should
be charged an overall income tax but no specific transaction
tax. STT, which is generally used to reduce volatility in the
market, has been generating impressive revenues for the Indian
exchequer. The government has been earning roughly about Rs
6,000 crore annually from STT. “In India, STT is a straight
issue of revenue,” Mistry said, mounting his attack on the
tax.
Transactions
taxes distort the market and hurt the very crucial process of
price discovery in the financial Markets. Moreover, such taxes
raise the transaction costs in a country vis-à-vis those that
do not levy similar taxes. Mistry said India has been loosing
various financial activities to overseas Markets due to high
transaction costs.
There
is evidence of that happening already, he said, alluding to
the Indian rupee non-deliverable forward (NDF) market, Nifty
futures, credit default swaps (CDS), American/global
depository receipts (ADR/GDRs), and over-the-counter equity
derivatives.
For
instance, CDS and OTC equity derivatives market have 100% of
their market share overseas, while almost half of the INR NDF
market has shifted abroad. Mistry said that as opposed to its
intended role of reducing volatility in the market, STTs
exacerbate assert price volatility while reducing market
efficiency.
Giving
an example of Sweden - which imposed STT in 1980s - Mistry
said almost 60% of the trading volume shifted to overseas
Markets like London and New York after the levy. When asked
whether the proposed Goods and Services Tax (GST) would be an
appropriate way to tax financial services, he said, while it
is theoretically possible it may not be practical.
