Trading cost to rise from today

16 May, 2008, 0036 hrs IST,Shailesh Menon, TNN

MUMBAI: The cost of trading in Indian equities could rise marginally as brokerages will levy 12.36% service tax on transaction charge, auction commission and bad delivery auction commission from Friday. The levy, as per the direction from finance ministry, will be charged on all market segments — cash, F&O and debt — and it would be passed on to the investor.

Though, it is not very clear as to what impact the levy will have on regular market, brokers feel the levy is too small to dissuade investors, and is unlikely to hurt trading volumes.

“There will only be a very meagre erosion in profits earned,” said Mayank Shroff of PPJ Shroff Securities.“The taxed portion is so petty that if a investor trades on Rs 1.5 lakh worth of shares, he’d be paying only about 63 paise as service tax on transaction charges,” Mr Shroff added.

A section of the market, however, feels the levy — however small it may be — could further squeeze the already wafer thin margins of day traders.

“Lay investors are not well-versed with the charging pattern of brokerages. They might actually take the levy very seriously and put a curb on the number of trades done by them. These days, the market is also not very encouraging,” a broker contended.

According to India Infoline vice-president (strategy) Harshad Apte, the new levy is not going to cut volumes on the exchanges. “It is too small to impact trading volumes,” Mr Apte said.

However, the meagre rise will surely go a long way to cement India’s position as one of the most expensive markets to trade in. As per data published (prior to the new levy) by Elkins/McSherry, a New York-based global financial consultant, India is among the top 15 countries with a higher share trading costs. Placed at the 11th spot, just behind Chile and China, the average cost of executing a trade in Indian market is pegged at around 51 bps.

According to Elkins/McSherry, Venezuela, with an average trade cost of 90 bps, is one of the most expensive markets in the world. Peru and Philippines are at the second and third spot with an average billing of 87 bps and 70 bps respectively.

As far as India goes, average commission (or brokerage) rounds off to around 30 bps, considered very high when compared with emerging markets like China, Brazil, Korea and Russia. Market impact costs (charges like STT, stamp duty, investor protection fund, etc.) are relatively lower in India at around 10 bps.