The Hindu Business Line : 'New tax will cut volume'

THOUGH the domestic players and analysts are hopeful that the proposed tax on the transaction of equities would be modified this week to lessen its possible impact on the market, many have painted a grim picture if it is imposed as envisioned by the Budget.

"The tax will result in wider spreads for trade, which in turn would mean, less frequency of trades and lower volumes and greater impact cost," feels Mr V.K. Sharma Director of Anagram Stock broking.

According to him volatility may rise initially by almost three times and the higher impact cost may reduce the number of scrips, which will meet the trading specifications of the foreign institutional investors.

He apprehends that the reduced liquidity will tend to make the market vulnerable to price riggers. Some even fears that it may induce volume shift to dabba traders or unauthorised market.

The other serious fears include freeing long-term holding by investors without attracting capital gains tax and may cause over supply in the short run. For some proprietary traders this may also serve as an opportunity to book profits completely at will sans any tax.

According to Mr Janardhan Kothari, an investor, points out that the Budget expectation that the new tax would garner a revenue of Rs 4,000 crore against Rs 700 crore in a year is faulty because it assume the transaction level would remain the same as that before imposition of the new proposal.

In his opinion, the new tax will reduce volume to a great extent and in turn push the collection down. A graded application of the tax on transaction in equities may fetch much more than what the capital gains tax could fetch in a fiscal so far, he felt. Mr Kothari suggested that delivery in the F&O transitions be made mandatory and transactions which result in delivery should be taxed on the sellers.

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