Budget 2016: Near 3-fold hike in securities transaction tax won’t hurt much

MUMBAI: The nearly three-fold, unexpected increase in securities transaction tax ( STT) on options sellers to 0.05% from 0.017% from June 1 dampened market sentiment a bit even though the hike will not amount to much, given that options premiums are much lower than their notional turnover.

The outgo is not large in absolute terms as STT is charged on options premiums, but prop traders said bidask spreads might widen a bit, making options slightly costlier, until markets shrug off the hike.

“It’s more of a sentiment shocker,” said Alok Churiwala, managing director at Churiwala Securities. “Markets will absorb this just as it did the rise in minimum size of index derivatives contracts to Rs 5 lakh from Rs 2 lakh earlier.”

The math bears this out. The premium turnover on index and stock options in the current fiscal up to February 26 was Rs 2.02 lakh crore on NSE.

Based on the extant STT rate of 0.017%, the outgo on this will be Rs 34.37 crore. With the increase in STT to 0.05%, the outgo will jump to Rs 101 crore, an insignificant amount compared to the average daily derivatives turnover of Rs 2.6 lakh crore on NSE in the fiscal to date.

“While those who sell options will have to shell out more, the amount is pretty insignificant,” said Siddharth Bhamre, head of derivatives at Angel Broking.

Some individual prop traders such as Aadil Sethna said that bid-ask spreads would widen as sellers demand higher costs from buyers of call and put options on Nifty, Bank Nifty and stocks. Buyers purchase index and stock call or put options from sellers or writers. They square this off by selling the options. Writers are normally proprietary traders.