What do uniform stamp duties mean for stock markets?

During the week, the Ministry of Finance issued a circular announcing uniform stamp duty on all financial market transactions effective 09^th January 2020. This had been on the cards for quite some time since Piyush Goyal first made the announcement in the interim budget 2019. Here is what it means.

Uniform stamp duty takeaways

Currently, when you enter into a capital market transaction, there is stamp duty payable on a per contract note basis. This amount is mentioned at the bottom of the contract note. The whole problem today is that stamp duties are levied by the state governments and each state levies its own rate of stamp duties on different financial products. Brokers are required to charge stamp duty to customers at the rates applicable to the state where the client’s account address is located. Then, these stamp duties are remitted by the broker to the respective states. Under the new arrangement, the stamp duty will be charged on financial products at a uniform rate and the broker will only have to remit the amount to the exchange. Here are the rates of stamp duty applicable.

In the above cases, the stamp duty will apply on notional value of options and only on the buy side of equity delivery.

Is this a positive move?

For brokers and for market efficiency it is surely a positive move. They do not have to worry about multiple rates and multiple states to interface with. There is a uniform rate that is charged and paid to the stock exchange. Secondly, most traders and investors are also likely to benefit. The only states where active traders would lose out are Andhra Pradesh, Haryana and Telangana where there is a cap on stamp duty. Karnataka traders could also lose out due to lower rates currently. However, in the active markets of Maharashtra, Gujarat and West Bengal, this move is likely to bring down the overall stamp duty liability for traders and also for investors.

Two areas to watch out

In the fine print of uniform stamp duty announcement two things will strike you. Firstly, all proprietary trades of brokers will now be subject to stamp duty. Currently, brokers do not have to prepare contract notes for prop trades but now contract notes will have to be prepared and stamp duty also paid. That will add to prop trading costs. Secondly, off-market demat transfers will also come under the purview of stamp duty. So shares gifted to relatives or even shares transferred in the case of unlisted shares will entail payment of stamp duty on stated consideration. That will certainly be an added cost for traders and also to investors!