Cost Of Trading

In India, capital markets have been playing a vital role in determining the fate of the economy and helping it to grow further. In capital market, stock exchanges are a vital institution and are known to be an important intermediary which provides an organized marketplace for transparent price discovery and helps in trading of securities such as equities or bonds. It should be noted that when a party trades with another party on a stock exchange, the first party not only pays or receives the price (during trading), but also incurs an additional cost which is known to be the cost of trading. Cost of trading has an important bearing on the efficiency of the capital market and thus calls for a critical examination on proper addition/deduction of the additional charge.

Types of Trading Costs

If we look at the trading costs incurred we find that there are three major sources by which Investors/ traders incur trading costs:

1) User charges – User charge is required to be paid in return to the use of infrastructure facilities of three separate entities namely brokers, stock exchanges and depository service providers. The charges implemented by these entities are known as the brokerage fees, exchange transaction charges and depository charges respectively.

2) Statutory levies – Incase you transact on an exchange; you are entitled to four different kinds of statutory levies. They are as under:

• Securities Transaction Tax (STT)
• Service tax on brokerage
• Stamp duty
• SEBI turnover fees.

STT and service tax on brokerages are revenues of the Central Government, while stamp duty is collected by respective state governments. SEBI turnover fees flow into SEBI General Fund.

Base for all these levies is transaction value, except for service tax on brokerage, which is applied on the brokerage fees charged by the brokers. The levies are uniform across the country except the stamp duty which is payable as per the regulation of the state in which the transaction takes place.

3) Impact cost – It is an indicator of liquidity of a market and arises because of the absence of perfect liquidity in the markets in the real world. Lesser is the liquidity in the market, higher is the impact cost.

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Trends in Trading Costs

According to the world’s largest credit rating agency there has been a considerable decline in the total trading costs globally over the past few years. India is no exception and has followed the same path, though currently the total trading cost in India is well higher, as compared to the costs in some other major emerging markets in the world. During the era of 1990s very less competition in the brokerage industry was seen due to the presence of less number of brokers in the market. However, with the gradual opening of the economy and the appearance of demutualized exchanges on the exchange landscape, the entry barrier for the brokers has minimized which resulted in high competition in the brokerage industry. This resulted in substantial fall in the brokerage fees from over 200 basis point to 10 basis points recently.

A similar trend was seen in case of DP charges and stamp duty. With the technological impact which abolished the existence of physical shares in the market, the charges declines and this also helped in quick transaction and transfer of the shares.

During the budget of 2008, a change in the Income Tax regime regarding the treatment of STT was implemented. In cases where income from securities transactions is treated as business income, STT began to be treated like any other deductible expenditure against business income rather than a rebate against tax liability, which was the case earlier.

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Despite the rationalization of STT in 2008, the rate continues to be high at 0.125% in case of delivery based transactions in equity. The figure 0.125% of 12.5 basis points seems low, but given the fact that the tax base is taken as gross transaction value and not the profit from trade, it results in high cost for the investor. STT was implemented in 2004 in order to simplify the tax regime on financial market transactions. Tax on long term capital gains were abolished and short term capital gains were taxed at 10% from the earlier 33%. Due to the ease of tax collection, STT rates have generally been raised progressively over the years. However now when the global financial market is getting integrated, high STT could drive out financial activity and discourage trading volumes in India.

Conclusion

Thus to conclude we can say that with the global trend, the cost of trading in Indian exchanges has declined over the years, yet the trading costs remain relatively high in the Indian economy which is a matter of concern as it deprives the investors willing to invest in capital market. Also despite the fact that trading takes place through exchange, the changes for the exchanges account for a miniscule part of total trading costs. It is important that the government takes proper necessary steps to reduce STT or the tax base so as to encourage increased participation, which will help the economy with the rising volume.