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Part - II

The turnover tax is a tax put on every transaction above the turnover amount. It is easy to collect as the tax gets deducted at the broker's end. There will be less speculative trading for there is a disincentive to trade frequently. Why are the brokers so concerned? Basically most of the trade in the stock market is speculative and not delivery based. The broker will have to bear a transaction tax for every transaction. This will result in the drying up of volume, driving investors towards a completely illegal market referred as the "dabba market", a largely word-of-mouth stock trading system, operated by erstwhile brokers who do not register the transactions with the official stock exchange, thus bypassing the regulatory body and leading to tax evasion. Since all trade is done through a broker, the honest investor has to fall back on the traditional bank and in the process lose money with each increase in inflation. Indeed, there may be loss of revenue for the government and this may create more problems for the regulator in terms of price distortion and market manipulation. For a "volume driven" market with the profit margins being around a slender six per cent, in the current scenario of high inflation, the transaction tax would be a nail in the coffin for the investment community, and particularly the brokers!

Therefore, after concerted effort by the investment community, the regulator (the Securities and Exchange Board of India (SEBI)) and the broker community, the Finance Minister finally drew a truce by amending the structure of the transaction tax. The new transaction tax will be on delivery-based transactions, and the 0.15 per cent tax will be shared between the buyer and the seller. For day-traders and arbitrageurs (paying income rather than capital gains tax), the turnover tax has been cut sharply to 0.015 per cent from 0.15 per cent. In the futures and options segment, the tax has been cut sharply to 0.01 per cent from 0.15 per cent. Finally, for the bond and debt market, the transaction tax has been removed. The market responded very well to the new tax regime as was evident from the bull-run that followed the Finance Minister's statement. Now the investment community is looking to the skies to ascertain the future direction of the stock market. An investor will be left to ponder whether money making is really as easy as it seems in the stock market or whether something called "common sense" does exist when the genuine "hard working-honest-sincere" Indian goes to the bank to lose his money. It may be that the banks ought to be compared with the results of smoking. That is, if you have to die, then you die slowly, whilst enjoying its pleasurable effects (the 3.5 per cent return as compared to the 6.5 per cent inflation); rather than die quickly, but with more dramatic effect, by playing on the stock market.

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*Contributed by -
Prof. D. Tripati Rao and Varun Trivedi (PGP I),
Xavier Institute of Management,
Bhubaneswar.