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If the securities transaction tax must stay, it needs to be made more broad-based
A proposal to impose a commodity transaction tax has encouraged extreme arguments from both sides of the debate. This discussion needs to be nuanced in view of the most desirable option and what is possible in the coming budget. The movement towards low taxation of savings and investment was assisted by the lowering of the capital gains tax in 2004. Unfortunately, this was seen as a package deal alongside the introduction of the securities transaction tax (STT). First principles of economics would urge that in a country like India, consumption should be taxed and investment encouraged. Those with higher incomes should be encouraged to save and invest, for that generates productive capacity and jobs for the country at large.
The taxation of securities transactions is undoubtedly a troublesome venture. But at the end of eight years of UPA laxity on expenditure, there is a fiscal crisis almost reminiscent of 1991 or 2001. It is, hence, not easy to give up Rs 8,000 crore of tax revenue. In addition, there is a danger that removing the STT will lead to the taxation of capital gains — and that is likely to be a bigger evil than the STT. Another dimension lies in market surveillance, given low quality regulators in India: taxing transactions helps deter circular trading.