Day traders to take a day off on April 1

[K.Karthik Raja]

Day traders to take a day off on April 1
31 Mar, 2008, 0409 hrs

MUMBAI: Come April 1, many jobbers and arbitrageurs will be taking a
break from what they do the best -- day trading. The move is intended
to express concern over the impact of the proposed withdrawal of
securities transaction tax (STT) benefit under Section 88E on their
business. It is not a strike, but a section of arbitrageurs plans not
to do business that day.

According to arbitrageurs, the withdrawal of the STT benefit will make
their business unviable as it will put further pressure on margins.
Given that these players provide liquidity with high intra-day
volumes, their absence could make the market shallow and push up
impact costs, brokers said.

Stock brokers are meeting on April 1 in Mumbai to discuss their future
course of action in the wake of the budgetary proposal. "This is an
informal get-together. Some like-minded people are meeting to discuss
different business options after we thought it is not viable to do
arbitrage without Section 88E benefit," said Rajesh Baheti, MD,
Crossseas Capital Services, a Mumbai-based arbitrageur.

Trading volumes could drop anywhere between 25% and 30% on April 1 in
the absence of participation from arbitrageurs. However, the quantum
of the fall will also depend on how many players remain out of action.
Though Mumbai accounts for a major portion of day trading volumes,
there are many players based outside Mumbai who may continue to do
business as usual, reducing the impact on volumes, said a broker.

In his budget for 2008-09, the finance minister did away with the
Section 88E benefit, disallowing STT as deductible expenditure while
computing income from business. Under the current practice, day
traders add the STT amount to the total income (including income from
trading activity and other income) and subsequently work out income
tax payable. Under Section 88E, they are entitled to get tax rebate
and pay only the surplus of total tax over STT towards the end of the
year. However, this benefit of setting off income tax against STT
would not be available once the new proposal becomes effective.

According to arbitrageurs, disallowing deduction under Section 88E
will not only directly affect arbitrageurs, but also hedgers or any
other market participants who claim "business income" from stock
market transactions. Even within the delivery business segment,
arbitrageurs and frequent traders are subject to "business income" and
not eligible to claim "capital gain". They claim that as STT will be
disallowed as a rebate, this section of the market participants will
be taxed at almost 80% (based on assessment year 2007-08 data),
skewing the risk-reward ratio beyond sustainability. This would drive
most of them out of the business of professional trading, i.e.,
arbitrage and as liquidity providers.

The Association of National Exchanges Members of India (ANMI) has
submitted a memorandum to the government, urging it to reconsider its
budget proposal and allow the deduction to continue. The memorandum
says, "It is our contention and belief that should any tax be levied,
whether direct or indirect, its rates must offer the tax payer a fair
and equitable deal. The government's current intended direct tax rate
is at 33.33% of income, while the intended indirect tax rate is at 16%
of value added. Against this, the current tax rate for this segment is
over 50%, which is more than the combined effect of direct and
indirect tax rates.

It says that to strengthen administration of STT, the exchanges may be
asked to furnish client-wise STT data. "However, if at all STT has to
be treated as an indirect tax and not income tax, STT rates for
trading (non-delivery and F&O segments) need to be reduced by 66.66%
to bring it to parity with indirect taxation rates applicable
generally," adds the memorandum.