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 governments 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.