With small retail investors continuing to flock to the equities in a big way, traders and market participants are batting for a slew of measures, including rationalisation of taxes, higher tax exemption on capital gains and reintroduction of rebate on securities transaction tax (STT), in the upcoming Budget, .

In its proposal to the Central Board of Direct Taxes (CBDT) last week, the Association of National Exchanges Members of India (ANMI) has sought exemption of Rs 3 lakh for short-term capital gains and Rs 5 lakh for long-term capital gains.

Currently, there is an exemption of up to Rs 1 lakh for long-term capital gains (equity investments of over 1 year) and no exemption for short-term capital gains (equity investments of less than a year).

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“This will improve more participation in the market and also encourage investments. Any marginal revenue loss (for the government) will be recouped by increased volume on which STT etc. can be earned,” said Vinod Kumar Goyal, national president of ANMI.

Earlier last month, several market participants had also met finance minister Nirmala Sitharaman and put forward several proposals, including rationalisation of the capital gains tax structure to minimise arbitrage opportunities and higher STT on high-frequency trades in the futures and options segment.

“The current capital gains tax structure is complex, with multiple rates depending on the type of capital asset and the holding period. There is a need to simplify this,” said Dhiraj Relli, MD and CEO, HDFC Securities. “However, if this results in higher tax outgo or more extended holding periods on listed securities, the markets may react adversely in the short term.”

Apart from this, traders will closely watch any changes in taxation regarding futures and options segment amid growing concerns over retail investors losing money in this segment. Questions have been raised about whether there is a need for a mechanism to discourage small investors from entering the F&O market.

Ashish K Singh, partner at Capstone Legal, said the government might increase tax on F&O to protect the market’s volatility. “The government wants to discourage retail investors as their investment decisions tend to get affected by informal sources rather than research,” he said.

In its proposal, ANMI has also suggested treating gains or loss arising from intraday transactions at par with business income and not as speculative income.

The Income Tax Act has too many classifications of heads of incomes arising out of the capital market transactions. This creates fungibility problems with respect to profits or losses incurred in different types of trades. For example, intraday cash market trading is classified as speculative income but intraday derivative trade is classified as business income,” ANMI said.

Goyal added that treating intraday trading as business income can help in keeping retail investors away from F&O. Meanwhile, Relli said imposing higher tax on high-frequency trades may impact the volumes and depth of the market and adversely affect the revenues of the exchanges/SEBI.

Apart from this, market participants are hoping for relief on current taxation system on dividends.

“At present, TDS on dividend is not required to be deducted if dividend does not exceed Rs 5,000. However, this is limited to individual recipient shareholders only. For the sake of ease of doing business and reduction in paperwork (TDS certificate/26AS/ AIS), this be applied to all resident shareholders irrespective of status,” ANMI said.

The association has also sought raising the threshold from Rs 5,000 to Rs 50,000 per company per person.

“Current taxation on dividends in the hands of shareholders is viewed as double taxation since the company already pays taxes on its profits. Any relief from this double taxation on dividends would be appreciated,” Relli said.