The government has raised securities transaction tax (STT) on futures and options contracts after amendments to the finance bill, 2023, were passed in the Lok Sabha on Friday. The development was confirmed by a source who spoke to news agency Reuters.
STT on options contracts has been hiked to 0.021 per cent from 0.017 per cent, stated in the Finance Act (2004), according to the source. Meanwhile, the STT for futures has been hiked to 0.0125 per cent from 0.01 per cent.
The hiked tax will come into effect from April 1, 2023.
“The increase in STT will specially impact high frequency traders (HFTs). Any change in the cost structure has a material impact due to the thin spread in which HFTs operate,” said Rajesh Gandhi, partner, Deloitte Haskins and Sells LLP, told news agency Reuters.
Gandhi said foreign portfolio investors do not get a deduction for STT while computing capital gains on derivatives.
Among other things, a proposal to remove long-term tax benefits on debt mutual fund investments was also passed in parliament as part of amendments to the finance bill.
The development could be a big blow to people who want to invest in debt mutual funds, which have gained popularity due to long-term tax benefits. With this, the popularity of debt mutual funds in India is likely to fall as well.
The decision could help bank deposits grow, which have been struggling to keep pace with the demand for credit over the past 12 months, leading to higher funding costs for lenders.
Mutual funds with less than 35 per cent invested in equities are proposed to be treated as short-term, which could lead to the removal of indexation benefits that are crucial for reducing the tax liability for such funds.