Budget 2025 wish list: Stock market liquidity down 30-40%, rationaise STT, say analysts

The steps taken last year to curb excessive speculation in the market may have started showing impact, with liquidity taking a hit, said analysts as they look at the forthcoming Union Budget 2025 for any respite for small investors. 

In the previous Budget, the long-term capital gains tax (LTCG) on all financial assets, including equity, was hiked to 12.5 per cent from 10 per cent, while the short-term capital gains tax was raised to 20 per cent from 15 per cent earlier. The Security Transaction Tax (STT) on futures was also upped to 0.02 per cent from 0.01 per cent while the STT on options was raised to 0.1 per cent from 0.062 per cent. This was effective from October 1. 

Jimeet Modi of SAMCO Securities said the steps taken in past two years, in the Budget and outside it, on taxation and regulatory fronts have resulted in India’s premium taking a hit compared to other emerging markets (EMs), adding that it has hit the market liquidity. 

"For example, the regulatory action have completely destroyed the currency derivative market in India, which has dipped to Rs 5,000 crore daily turnover from the Rs 40,000 crore in daily turnover earlier. In addition to this, series of regulatory actions on the equity derivatives segment of the Indian capital market, plus hiking the Securities Transaction Tax (STT) across the board, have considerably reduced the liquidity in the market by 30-40 per cent as compared to earlier period when the rates were not tinkered," he said.

To maintain the liquidity in the capital market, he urged the government to rationalise the STT rates on futures & options and other instruments. It may probably result in loss of revenue for the government to some extent, but what it will be more than compensated by the new inflows that will come in by way of increased liquidity and by way of increased participation, Modi said.

"Taxation expectations are centered around rationalizing capital gains tax to simplify compliance and encourage broader market participation. While there has been some speculation about a cut in the Securities Transaction Tax (STT), this seems unlikely given the government’s revenue focus. Instead, there could be targeted relief for individual taxpayers through higher deductions under section 80C and potential adjustments in the new tax regime to support consumption, said Pranav Haridasan, MD and CEO, Axis Securities.
       
Niranjan Govindekar, Partner, Corporate Tax, Tax & Regulatory Services, BDO India said the FM may streamline the capital gains tax structure by aligning tax rates and period of holding across various sub-asset classes, for instance, treating international equities the same as domestic equities, debt funds the same as gold funds, and gold funds the same as gold ETFs.

"The hike in short-term rates from 15 per cent to 20 per cent and in long-term rates from 10 per cent to 12.5 per cent has raised investor tax liabilities significantly. Since now the LTCG tax on securities is on par with other assets, the Securities Transaction Tax (STT) should be abolished," Govindekar said.

Rajesh Cheruvu, MD and CIO at LGT Wealth India, said: “In taxation, stability is crucial, with no significant changes expected in STT or LTCG. Maintaining the status quo could be the best outcome for investor confidence. Overall, the Budget’s challenge lies in balancing fiscal discipline with growth priorities, while ensuring market-friendly measures.”