Thoughts on the Indian Economy

Thinking about assorted economic issues in India.

Friday, January 27, 2006

Securities Transaction Tax

With Budget season upon us, members of the Left in parliament have made demands to increase the security transaction tax. When introduced, the rate was .15% on a delivery-based transaction and .015% on a non-delivery-based transaction. The Left wants to increase the tax on non-delivery-based transactions to .1%. People who support the tax argue that not only is this a good source of revenue for the government, STT curb speculation and reduce volatility in the markets. Opponents of the tax do believe STT obstructs the informational efficiency in the markets.

Aside from all the hue and cry, the fact is that STT experiments in other countries have not had the desired outcomes for the proponents of the tax. A survey of empirical economics literature looking at studies done on the STT experience of some East Asian countries, UK and Sweden reveals no significant effects on volatility. In Sweden, the experience was pretty bad since almost 50% of the trading volume migrated to London. In this case, increase in revenue from the STT was offset by a decrease in revenue from the capital gains tax.

The government should leave the STT alone to prevent further distortions in the market and maintain liquidity as well as preserve the informational value in trading.


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