Securities Transaction Tax Reduction and Stock-Futures Arbitrage in India

14 Pages Posted: 23 Jan 2012 Last revised: 7 May 2012

Ronald T. Slivka

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering

Pankaj Aggarwal

New York University (NYU) - NYU Polytechnic School of Engineering

Kunal K. Shastri

New York University (NYU) - NYU Polytechnic School of Engineering

Raghvendra Sisodia

New York University (NYU) - NYU Polytechnic School of Engineering

Date Written: April 30, 2012

Abstract

UK Sinha, Chairman of the Securities Exchange Board of India (SEBI) announced in November, 2011 that SEBI had engaged the Ministry of Finance in a discussion hopefully leading to a reduction of India's Securities Transaction Tax (STT) discussion that would hopefully produce benefits to India's capital markets (CNBC, 2011). The matter of reducing or eliminating the STT is presently under study by the Ministry of Finance and will come before the Indian Parliament in February 2012. Removal of this 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.

In this study both intraday and inter-day data on a representative selection of single stocks and their associated futures contracts is used to explore the effects of reduction or elimination of the STT when single stocks are arbitraged against their related futures contracts. For this purpose data was chosen spanning selected days in June through December 2011 for eight liquid single stocks. Since the profit from a potential arbitrage can be calculated in advance of entering a trade, the number of profitable single stock arbitrage trades available on a specific day can be calculated after accounting for STT cost ranging from zero to 100% of its current statutory level. The result of this careful analysis suggests a decrease in the STT of at least 75% is necessary to achieve meaningfully increased levels of arbitrage normally found in most successful global futures markets. Such a decrease in the STT is also likely to result in the maximum transaction revenue collected by the government.

Keywords: Securities Transaction Tax, STT, India futures, single stock futures, arbitrage, zero arbitrage band, India, forward arbitrage

JEL Classification: E62, G13, H21

Suggested Citation

Slivka, Ronald T. and Aggarwal, Pankaj and Shastri, Kunal K. and Sisodia, Raghvendra, Securities Transaction Tax Reduction and Stock-Futures Arbitrage in India (April 30, 2012). NYU Poly Research Paper No. 1989539. Available at SSRN: https://ssrn.com/abstract=1989539 or http://dx.doi.org/10.2139/ssrn.1989539

Ronald T. Slivka (Contact Author)

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering ( email )

Brooklyn, NY 11201
United States
2153213524 (Phone)

Pankaj Aggarwal

New York University (NYU) - NYU Polytechnic School of Engineering ( email )

Brooklyn, NY 11201
United States

Kunal K. Shastri

New York University (NYU) - NYU Polytechnic School of Engineering

Brooklyn, NY 11201
United States

Raghvendra Sisodia

New York University (NYU) - NYU Polytechnic School of Engineering ( email )

Brooklyn, NY 11201
United States

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