Is Levying a Uniform Stamp Duty On Financial Transactions a Sensible Idea?
Feb 11, 2019

Author: PersonalFN Content & Research Team

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There was an interesting announcement in the Interim Budget 2019 in Paragraph 86; it was about the stamp duty on financial transactions. However, with the media's focus being entirely on the budget announcements for farmers and the middle class, the one on stamp duty may have not caught the attention of many.

But those who are affected by it are reacting strongly.

What was the announcement in the budget speech?

Our Government had promised last year that we will carry out reforms in stamp duty levied and collected on financial securities transactions. I am proposing, through the Finance Bill, necessary amendments in this regard. The amendments proposed would usher in a very streamlined system. Stamp duties would be levied on one instrument relating to one transaction and get collected at one place through the Stock Exchanges. The duty so collected will be shared with the State Governments seamlessly on the basis of domicile of buying client.

In other words, the government wants to bring in uniformity in the levy of stamp duty on financial transactions. As you might know, the parliament can fix the stamp duty rates on various financial instruments such as insurance policies, transfer of shares, debentures, bills of exchange, promissory notes, etc.

What will change for brokers and exchanges?

Before the government made this announcement, stamp duty on financial transactions was a state subject. State governments used their discretion to decide the rate of stamp duty depending on whether they wanted to discourage or encourage financial market activity.

Now the government wants to bring in uniformity on the tax levied.

The Association of National Exchanges Members of India (ANMI) had demanded the abolition of stamp duty since States have been getting their share in Securities Transaction Tax (STT).

Mr Rajesh Baheti, the President of ANMI expressed displeasure about the decision while speaking to Moneycontrol. "Rather than abolish stamp duty as the STT is already levied on all transactions, the government has de facto imposed a state STT in the guise of stamp duty. ANMI wants the abolition of the stamp duty as states are already a recipient of their share from the STT pool, " he said.

However, exchanges have a different take on the subject.

Metropolitan Stock Exchange (a 'recognized stock exchange'), CFO, Mr Kunal Sanghavi sounded satisfied with the announcement of uniform stamp duty. "This brings in a lot of comfort, not only in terms of bringing down the cascading effect of the duty but also in terms of ease of compliance. This will end the ambiguity among the broking community where clarity was missing on the states in which stamp duty has to be deposited and which states rates to be applied. While we await details, it will also ease things operationally for member brokers and the process will become seamless, similar to STT, " he said.

What will be the impact on issuers and corporates?

Some experts believe the cost of issuing debentures would go up. This may also have a bearing on mergers and acquisitions.

What is the impact on mutual fund investors?

Unless the centre announces the rates, it would be difficult to gauge the specific impact-- whether the implicit cost of transacting would increase or reduce. But broadly, the cost of investing for those living in the states that currently charge very low stamp duties, stand to lose and vice-a-versa. Compared to investors, the incidence and impact of stamp duty will be higher for traders.

In other words, if you invest in a mutual fund scheme that churns its portfolio often, you are likely to shell out more money by way of higher expense ratio if the mutual fund house is not ready to bear that cost. If you are a cost-cautious investor, you should invest in direct plans offered by mutual funds.

Here's how you can lower the impact of stamp duty on your wallet...

As an investor, avoid frequently churning your investment portfolio. If you believe, not churning the portfolio will limit your gains, it is a fallacy. On the contrary, if you select the best mutual fund schemes that hold the potential to clock a luring rate of return, you need not worry.

[Read: Looking for the Best Large Cap Funds 2019? Find Out Here]

The winning mutual fund schemes will generate wealth for you in the long run. However, make sure you are choosing mutual funds in congruence to:

Your risk appetite

Your investment objectives;

Your financial goals;

And the time horizon in hand before goals befall

Evaluation of these factors will help you arrive at your personalised asset allocation. You should always follow your personalised asset allocation to take investment-related decisions.

Investing in mutual funds and shares involves risk. Thus, you should have a time horizon of over five years if you are investing in them.

[Read: Which Are The Best ELSSs (Tax Saving Funds) For 2019?]

Mutual fund investors shall be careful about the schemes they invest in. Avoid schemes with very high portfolio turnover ratios. One should consider various quantitative as well as qualitative factors before investing in mutual funds.

Do note that as a result of a uniform stamp duty, there will be no change as far as operational procedures or compliances are concerned.

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