Squeezing Out

In a letter to the Central Bank, the Primary Dealers Association says the killer tax of 0.1 percent is threatening money market and gilt-edge securities transactions, despite the budget unveiling numerous measures to boost the financial sector.

rnrnThe Association
quote s President, Ajantha Madurapperuma identified the killer tax on financial transactions as ldblquote an apparent oversight
dblquote that will discourage money market investments and government securities trading.

rnrnldblquote The impact of the tax will be especially severe on market repo transaction, which is the most active element in the secondary market for government securities
dblquote , Madurapperuma said.

rnrnRepo transactions include sale and buyback agreements on government securities and borrowings against government security holdings.

rnrnUnder the proposed tax, market players engaged in repo transactions on an overnight basis would pay a tax of 0.1 percent on the transaction on a daily basis. This would amount to a 24 percent tax on the repo transactions, when annualised based on 240 working days on a simple basis.

rnrnldblquote However, if you compound your daily tax payment on a compounding basis, it would amount to almost 30 percent per annum. When compared to the yield on a one year treasury bill at 13.5 percent, it becomes clear that the repo market cannot sustain this tax
dblquote , Madurapperuma said.

rnrnIntroducing the debit tax could also result in the disappearance of the short end of the government security yield curve, due to the discouraging effect on the money market investments, Madurapperuma added.

rnrnAccording to analysts, debit tax was in operation during early 1970
quote s, at an era of closed markets and restrictive economic policy.

rnThe tax drove businesses away from using cheque transactions. Businessmen instead, turned to cash dealings, making transactions less transparent. The government is looking at Rs. 2.3 bn in revenue, and Choksy says the move is a temporary phenomena and will be limited to one year.rn