The Hindu Business Line : Scalping the scalpers

THE proposal to introduce turnover tax in the Union Budget means that you will henceforth pay 0.15 per cent on the purchase price of stocks, equity derivatives and bonds. Students of economics will notice that such a tax is not entirely new.

Lord Keynes recommended such a tax in his seminal book The General Theory of Employment, Interest and Money. He wrote thus: "... The introduction of a substantial government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over the enterprise in the United States... ."

This quote suggests that Lord Keynes recommended turnover tax to curb speculation. Even the Nobel-prize winning economist James Tobin recommended such a tax to curb speculation in the currency market.

Called the Tobin Tax, the idea was to charge 0.10 per cent on transactions to make speculative activity costly.

The Finance Minister has recommended this tax not with the objective of curbing speculation. Rather, the tax has been imposed because the government finds it difficult to collect capital gains tax.

The turnover tax is likely to affect day traders the most. Such traders typically transact to gain from small price movements.

A day trader may buy 50,000 shares of Reliance Industries at Rs 420 only to sell at Rs 423. Such transactions are referred to as scalping trades.

The 0.15 per cent tax on Rs 420 would now increase the purchase price for the day trader. The profits on scalping trades will, hence, be lower. This could, perhaps, force such traders to lower their business volumes in the cash and the derivatives market.

The problem is that intra-day trades account for two-thirds of the turnover in the cash market. Experts, hence, fear that the turnover tax will reduce the overall volumes in the stock market.

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