The Indian government raised transaction taxes on equity derivatives in its federal budget presentation on Sunday in a bid to cool down derivatives markets, sending stock indexes down on concerns over trading higher costs.
The budget also proposed changes in taxation of buybacks, which involves companies repurchasing their own shares from existing shareholders usually from the open market or through a tender offer.
The Nifty 50 index was down 0.84%, while the BSE Sensex index was down 0.74%
The government proposed increasing the securities transaction tax on futures to 0.05% from 0.02% and on options to 0.15% from 0.1%. It also said share buybacks would be taxed as capital gains at slab rates, with large shareholders facing additional levies.
"Higher transaction costs are likely to reduce trading volumes, dampen short-term momentum, and lower profitability for active market participants. FII participation in derivatives may also moderate as post-tax trading efficiency declines, impacting overall liquidity," Raj Gaikar, a research analyst with Mumbai-based SAMCO Securities, said.
"This can create a cascading effect on revenue streams of broking companies, exchanges, AMCs, and depositories, which are closely linked to market turnover," he added.
Other analysts said that the increase will further cool derivatives trading in India and lead to reduction in volumes.
"The intent appears to be volume moderation rather than revenue maximisation, as any potential revenue gain could be offset by lower derivative volumes," Shripal Shah, MD & CEO Kotak Securities said.
India has been trying to reduce the derivatives trading activity through tighter regulations and increased taxes in the last two years as retail investors continue to make loses.
