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June 2014

And then there’s the proposal for a Financial Transactions Tax... Even to be considering this at a time when we are struggling to get our economies growing is quite simply madness -- David Cameroon, British Prime Minister.

tanginika-morris
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June 2014

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  1. And then there’s the proposal for a Financial Transactions Tax... Even to be considering this at a time when we are struggling to get our economies growing is quite simply madness -- David Cameroon, British Prime Minister How STT and CTT have affected growth of business , employment and investments inflows in India for the last 10 years June 2014

  2. We lack Volumes…… • Average Daily Volumes across the Globe in May 2014: • China is 9 times India and U.S. is 32 times India • We aspire to be among the world’s leading industrialized nations but the volumes of Copper, the flagship industrial metal, in China is 108 times India & in London 137 times India

  3. …...And Market Depth • How much Gold can you buy at best available Sell Price & Vice Versa without a change in Price? • At a Single Price, you can buy just Rs. 0.5Cr worth in India while you can buy Rs. 99 Cr in China & Rs. 28 Cr in U.S. SHFE China CME U.S. MCX India

  4. High cost leading to low participation by Large Corporates • Cost of Hedging is significantly high in India as compared to globally • Large Corporate have massive hedging requirements. Most Large Corporates are hedging more than 90% of their needs in International Markets • If large Companies can find hedging attractive in India, it will save millions of $ in foreign Exchange, increase employment in Indian financial sector, make our market vibrant and increase Government service tax collections. • Vicious circle: CTT is reducing liquidity & increasing hedging costs and hence these companies are finding India too expensive & shallow to hedge. Non participation by these companies is further reducing the liquidity.

  5. Huge Ecosystem benefits possible for Indian Industry hedging on abolishment of CTT • If we can abolish CTT & make our exchanges attractive to these companies: • A huge amount of margin money in Foreign exchange can continue to be in India and benefit the system • Liquidity in our markets will deepen and allow other industries like extrusions , plastics and so many others to hedge their risks • Huge saving of Millions of Dollars paid out by these companies in foreign exchange towards brokerage , commission , exchange charges • Increase in employment in Financial sector in India • Increase in service tax and other revenues to Govt.

  6. Global Index Volume Comparison • India Benchmark Index ( Nifty Futures) investments lowest in the World . • Investors who want exposure in any country can buy a Benchmark Index Future. • It will give them exposure to the Index without the expense of purchasing all the underlying assets on the Benchmark Index. • India might be in one of the top derivatives exchanges but only in number of contracts. In notional value, we are one of the lowest in G20 and lowest in BRIC Countries • USA leads the table with 36000 bn USD, about 90 times that of India. China is 30 times Source: WFE/IOMA Derivatives Market Survey 2012

  7. World Bank Turnover Ratios : Low Ratio holding back India Capital Formation • To measure the health of a market, most economists recommend: Turnover Ratio = Total Trading value of all shares in that year for a year Average of (Opening Market Cap and Closing Market Cap) • Ratio is used by World Bank for comparing countries with varied GDPs and Market Caps • Data for 9 years starting 2003, a year before STT • Brazil, Russia, China have grown 92% to 101% over 9 years while India has shown 61% degrowth • In developed countries, France which introduced FTT is showing degrowth as compared to a stable U.S. and Japan • At 2012 end, India’s turnover ratio was 55 compared to average of 94 for the sample with China’s ratio being 164 Low Turnover Ratio is affecting liquidity and investment flows in Indian industry Source: The World Bank, http:// data.worldbank.org/indicator/CM.MKT.TRNR

  8. Commodity volumes & Impact Cost : Pre & Post CTT % change in Impact cost from pre CTT to post CTT The volumes have crashed by 60% post CTT regime Source: Working paper on Impact of Transaction Taxes on Commodity Derivatives Trading in India by ICRIER * Volumes above are those on MCX

  9. High Transaction cost due to STT has led to export of our markets to other geographies.. • Result: Singapore NIFTY Volumes as a %of total NIFTY has breached 30%, directly affecting growth of our financial markets and employment • STT makes our trading cost 5 times the cost of trading in Singapore Source: Bloomberg Volumes of SGX and NSE are normalized to equivalent quantity, Currency factor has been taken at 50 Because Derivatives are a form of insurance or risk management, the cost of trading in them has to be low or investors will not find it economically sound to purchase such "insurance" for their positions

  10. Situation in terms of Open Interest is worse…… ……And Gains if we bring it back to India • It is shocking that open interest on NIFTY Futures worth Rs. 32352 Cr sits on foreign soil & is higher than that on NSE with Singapore having 60% market share • If this trade is retained in India: • The margin Money of Rs. 2543 Cr will be in India and benefit the system • These volumes will be great add to the market depth and reduce impact cost • It will enhance employment in financial sector • Increased Service Tax Collection on brokerage coming to Indian Firms instead of foreign counterparts

  11. Cost of Trade is very High In India • Explicit Cost of Delivery Trades in Cash Market • To buy securities worth Rs 1 Cr, buyer incurs Rs 23000 which is very high • STT first directly increases cost itself and then increases cost indirectly as the impact cost increases dramatically. • Out of total explicit cost 68 % goes to the government. How can any Industry survive after paying 68% to the government? • STT Constitutes 58 % of total explicit cost • Broker only get 29 % of the explicit Cost

  12. Regressive Taxation leading to Unemployment due to closure of Many Sub Brokers • Live Mint: 22nd January 2014 • 15,000 sub-brokers have gone out of business since April 2013: SEBI. • 30,000 sub-brokers have closed down since April 2011 • Reason mainly due to dwindling interest from retail investors and tighter regulations • Brokers also out of business, number fell by 600, highest in 3 fiscal years • Financial Express: 09th July 2013 • Stock Market: 14,000 sub-brokers shut shop • Worst time for a sub-broker • Cash Market volumes plummeting to record four year low • Declining Retail Interest • Surviving business has increasingly difficult

  13. Retail Participation is drastically down…. • Retail Active Investor Participation directly into markets is also down hugely. FII Participation is most desired but not their domination in absence of a counter force • Mutual Funds saw net outflow in Equity Schemes & cannot fund long term equity needs of midsize companies MF Equity Mobilization (in Crore Rs.) Retail Participation in Stock Market (%age of Total) Source: SEBI Handbook

  14. Silently, STT has put a No Entry to Growth of Middle India Active retail investors disallowed 88E tax rebate, face double taxation & have stopped providing liquidity Rules do not allow Institutions to invest in Low Turnover and High Impact Cost Companies Investor putting idle money into non productive Gold GROWTH

  15. Public Issue funding for Industry has dried up • New SME Market not even properly born • NSE SME Market inaugurated in Sep 2012, in 2years: • Only 5 Cos Listed • Raised only 86 Crores • Total Turnover only 40 Crores • Against 42595 Cr raised in 2007–08. Average of next 4 years only, Rs. 25963 Crore IPO Mobilization (in Rs. Crore) Source: SEBI Handbook

  16. STT Leading to shallow Indian Markets • More than 65% of Companies trade less than 2 Lakh shares a day • 476 cos ( 31% ) trade less than 20,000 !! • As a result, Strong Fundamentals of companies Ignored due to low liquidity as Investors avoid stocks with no exit, i.e. low liquidity, high impact cost caused by STT • Data is for 15th May 2014 to 14th June 2014 when the Index and Market Cap was the highest • Top 6% of the total listed companies dominate 82% of the turnover

  17. Futures is not just speculation : It has brought great benefits to the real ecosystem Castor Seed: A Case Study • Earlier farmers, just after harvest, were selling their crop to the processors at distress prices who were making super normal profits • Cynics say that farmers do not trade in India. But prices disseminated by NCDEX, FMC and MCX help the farmers know the correct price and ensure that processors pay them the right price • Also, efforts by NCDEX and MCX have ensured that an ecosystem of huge no. of modern warehouses along with laboratories and assayers. This safe system has encouraged modern financial players to deploy funds in cash and carry arbitrage with a return expectation of 15%. This far lower than the traditional moneylenders who used to rip off farmers , growers. • Financiers are storing in warehouses and are selling in the market in a staggered manner according to demand instead of all at harvest time • Earlier exporters could not take firm export orders as they were not confident of getting confirmed supplies at a fixed price. Now, exporters are buying far month futures and are able to quote firm prices and deliver schedules to overseas buyers . All this has ensured that Castor Seed exports from India have greatly grown in last 5 years along with the exchange ecosystem.

  18. Sec 88e removal in 2009 distressing effects on Market • Post u/s 88e removal from 2009 onwards Turnover has fallen continuously across all segments though Market Capitalization has increased.

  19. CTT is an entry level regressive tax and an albatross around the neck of market liquidity • When STT was bought in, official reason was in lieu of it, Capital Gain Tax benefit is being given. But no such benefit was given in lieu of CTT and hence there is no rationale for the birth of CTT. • People are paying indirect taxes: • excise on Manufacturing, • service tax on Services, • and VAT on sale. • And Direct Income Tax on Profits. • Then, what is the nomenclature of CTT ? • Thus, CTT is an entry level regressive tax and an albatross around the neck of market liquidity. It is a mindless collection of revenue lacking any basis.

  20. STT/CTT: Heavy double Taxation for people assessed under “Business Income” • STT was brought in with NIL Long Term Capital Gains Tax. However, people in Trade and Commerce, who are assessed under “Business Income”, in any case, pay full 30% Tax and Surcharge both for Equities and Commodities. They are not eligible for any benefits on Capital Gains • So paying CTT & STT and direct Income Tax at 30% leads to effective taxation rates upwards of 80% • Section 88E withdrawal from April 2008 led to huge fall in Market Volumes and Government collection of STT • Till 31st March 2008, STT was treated as tax rebate under section 88E and the market was somehow able to cushion the impact of STT slightly. However, the withdrawal of 88E and consequent double taxation completely broke the back of the market and huge fall in volume. STT Collection on delivery dropped from 5178 Cr in 2007-08 to 2869 Cr in 2013-14 • Worldwide in any Business there are 2 types Taxes:- Manufacturing(Vat, Excise,etc) or Service Tax. Derivative trading doesn’t come under Manufacturing and our Sector pays service Tax. STT is nor a manufacturing tax or service tax so it should be removed.

  21. Studies across the world have concluded huge Negative impact on Liquidity due to Financial Transaction Taxes

  22. Worldwide there is no Tax on Hedging Instruments • Among major nations across the world, there is no FTT/ STT except India and Taiwan

  23. Can this government abolish STT? • Welfare of India should be Government’s prime objective • Its decisions should not be influenced by revenue considerations alone • It needs to be a balance between market growth and revenue collection • People say Govt. will never abolish STT & CTT as it yields Rs 4000 Cr. • At National level, Rs 4000 Cr is not big. It is less than what TCS earns in 1 qtr • It is too small a price to pay for the prosperity of nation Continue with STT/CTT Boost Growth Increase market liquidity Bring back exported markets Kick start fundraising by Industry Increase Employment Collect Revenue of Rs 4000 Cr.

  24. Benefits to India on removal of STT and CTT • The Government should abolish CTT & STT and treat this Rs. 4000Cr as a historic national investment to take our markets to a much higher level. • Like any good investment, this investment will yield huge returns over time. • The removal of these regressive taxes will hugely reduce the impact cost in markets and greatly increase the liquidity. There will be huge gains resulting from deepening of National Markets & benefits to entire ecosystem due to linkages with the economy e.g. • Fund raising by industry ; • Channelizing of household savings in productive assets • Disinvestment by Govt. • Employment Generation • Taxes on profits of individuals and corporations due to buoyant economic conditions • Huge Increase in Service Tax because of Increase in Brokerage & Turnover.

  25. Our Request.. • For Indian taxpayers assessed under Business Income, paying 30% slab rates& not claiming Capital Gains, section 88 E tax rebate should be restored

  26. THANK YOU!

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