The imposition of stamp duty has riled many mutual fund investors. Ever since July 1, there is a 0.005 per cent stamp duty on all mutual fund investments. This means that if you pay Rs 1 lakh to a fund house as an investment in any of its schemes, it will deduct Rs 5 (0.005 per cent of Rs 1 lakh) and then allot you the units with the remaining Rs 99,995. That's not a big amount and in fact, it sounds like quite a trivial amount of tax to pay as far as a given investment goes.
But there are many investments like liquid funds and overnight where a short holding period is quite normal. As a matter of course, businesses park their cash repeatedly for very short periods of time in such funds, which are meant for such purposes. A duty of 0.005 per cent can compound to a significant proportion of the returns in such cases.
For example, for a holding period of four days, the compounding effect will be just above 0.4 per cent in annualised terms. That's a significant chunk of the returns that one would expect from such an investment.
However, as far as I'm concerned, that's not the real problem with this tax. This is a bad time for the economy and the country and there's a logic to paying taxes that do not hurt. The Government of India has just committed to free rations for 80 crore people and those who can pay must do their patriotic duty. However, this has no connection to that and in principle this is a bad tax. Tax should be on income or expenditure, not on just investments. When you invest in a mutual fund or a stock, you do not know whether the investment will yield any returns or not and if it does, then how much it will be. Capital gains and income tax are fine in principle. So is GST, which is a tax on consumption. However, a tax on just the act of investing, regardless of whether it will yield profits or losses, should not be imposed. This is wrong.
There are other taxes and levies like this. The STT (securities transaction tax) is already there, charged by the central government, while this stamp duty is a state tax. There's also SEBI's levy on equity transactions which are a cost that, in the case of mutual funds, is eventually paid by investors. Once they get imposed, these unfair and unprincipled taxes never go away.