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Why India Should Eliminate Its Securities Transaction Tax

An independent quantitative study recently completed at New York University's Polytechnic Institute strongly suggests the Indian stock and derivatives markets would benefit significantly from complete elimination of India's securities transaction tax (STT).

Yardley, PA - March 1, 2012

Removal of India's Securities Transaction Tax has been a long-term objective of brokers, stock exchanges and investors who compare the exceptionally high total transaction cost of fees and taxes in India with lower total costs in other countries. At the same time India's taxing authorities and regulators have been concerned about how to reverse the decrease in securities transaction volume over the course of the past two years. So while the finance ministers of many G-20 countries are considering the imposition of a new financial transaction tax (FTT) to pay for the costs of the credit crisis that began in 2008, India's government is considering a move in the opposite direction by lifting the STT to improve transaction volumes and attract foreign capital.

to improve transaction volumes and attract foreign capital. Until now there have been no known quantitative

Until now there have been no known quantitative studies that measure the possible policy effect of reducing or eliminating this tax. So in an independent study of STT reduction, Adjunct Professor Ronald T. Slivka of New York University's Polytechnic Institute and his co-authors selected an important class of hedging transactions in which stocks are arbitraged against their own futures contracts. Dr. Slivka pointed out that "the frequency with which this profitable arbitrage arises is very sensitive to transaction costs, so the effect of an STT reduction on arbitrage transaction volume becomes particularly evident. The study results can then be used by India's taxing authorities, brokers and regulators as a leading indicator of the effects of a proposed policy change in taxation ".

Dr. Slivka further commented that this particular class of vital transactions is also critical to establishing and maintaining an economic fair value for equity futures listed on the Bombay and National Stock Exchanges of India. Without maintaining such orderly economic fair values, both domestic and foreign institutional investors are likely to avoid or minimize certain securities transactions in India. Due to high transaction costs in India, beneficial stock arbitrage appears far less frequently than in normal capital markets, so lifting the STT is likely to produce increases in both pricing that more closely tracks fair value and in related transaction volumes.

The key result of this study at NYU's Polytechnic Institute suggests a decrease in the STT of at least 75% is necessary to increase arbitrage transactions to a level normally found in most successful global capital markets. Further, complete elimination of the STT is likely to double the arbitrage transaction volume found at the level of only a 75% reduction.

Key Words: Ronald T. Slivka, Securities Transaction Tax, STT, FTT, India, India futures, arbitrage, stock arbitrage


Ronald T. Slivka, Ph. D. 672 Long Acre Lane Yardley, PA 19067 USA Tel: + 215. 321. 3524


About The Study's Author Ronald T. Slivka is founder and principal of Portfolio Advice Associates, a firm serving institutional clients, money managers and brokers in contract marketing, training and consulting solutions for derivatives, structured financial transactions, indexes and risk management.

Prior to founding Portfolio Advice Associates, Ron held equity derivative sales management positions at Salomon Brothers, JP Morgan, ING Barings and ABN AMRO Bank. There he assisted major financial institutions, corporations and money managers in the Americas with the investment uses of portfolio trading, equity derivatives, quantitative strategies and risk management in US, global and emerging markets.

Ron has written over 30 articles covering derivatives and portfolio trading topics in developed and emerging markets. He has a BS in Physics from Carnegie-Mellon University as well as MS and PhD degrees in Physics from the University of Pennsylvania. He is an Adjunct Professor in the Finance and Risk Engineering Department of the Graduate School at New York University’s Polytechnic Institute and also serves on the faculty of the New York Institute of Finance.