New Delhi: Finance minister, P. Chidambaram, yesterday announced that the 0.15 per cent securities transaction tax (STT) proposed in his budget would be confined to only delivery-based trade in equities. The minister has exempted sale and purchase of bonds from the levy.

Day-traders and arbitrageurs have been virtually freed of the STT. This is because Chidambaram has not only slashed the STT rate to 0.015 per cent on the value of their transactions, but also allowed them to set off their entire STT liability against the tax paid by them on business profits.

The STT rate applicable on future and options trades has been pegged even lower at 0.01 per cent and these would again qualify for credit against tax on business profits.

Further, even in the case of the 0.15 per cent STT applicable on delivery-based trade in equity, the finance minister has made two significant modifications. Firstly, the 0.15 per cent rate would be split equally between the buyer and the seller. This is in contrast to Chidambaram''s original proposal, where the buyer was required to fork out the entire levy. Secondly, intermediaries who declare business profits on delivery-based transactions can also claim credit for STT against the tax paid by them on business profits.

The original 0.15 per cent tax would now apply to only the first category, whereas the second lot of investors will pay lower STT rates, on which they can also claim set-off against tax paid on business profit. The idea here is to minimise the incidence of tax on intermediaries who provide liquidity and volumes to the market.

The other major change in the STT regime announced by Chidambaram was the move to treat units of equity-oriented mutual funds as `securities''. What this implies is that transactions in such units will henceforth attract the 0.15 per cent levy as in delivery-based equity trade in stock exchanges. Further, they will enjoy tax exemption on long-term capital gains, along with the reduction in the tax on short-term gains from 20 per cent to 10 per cent proposed in the 2004-05 Budget.

"We are committed to deepen the debt market in the country," the finance minister said in his reply to the budget debate in the Lok Sabha. Bond market players had sought relief from the 0.15 per cent STT impost on the plea that margins in case of security transactions were wafer-thin compared to that on equities.

At the same time, trading in bonds and units of mutual funds other than equity-oriented funds will be subjected to the normal capital gains tax regime. This is because the zero per cent long-term capital gains tax and 10 per cent short-term capital gains tax is applicable only to securities attracting STT.