Securities transaction tax (STT)

Securities transaction tax (STT)

Subject: Economy

Context:

A substantial part of the submissions of the financial sector at the pre-Budget meeting centered around ‘taxation’ issues.

Details: 

• Capital market participants have  urged to reduce the securities transaction tax (STT) rate for cash market transactions, while hiking the STT rate for futures and options.
• The Alternate Investment Funds industry wants a tax pass of expenses to make them more globally competitive.
• Mutual fund industry and insurance sector representatives called for parity with the National Pension System (NPS) on the taxation front.
• Exempt NBFCs from TDS deduction by borrowers.
• Make NBFCs on par with housing finance companies, banks, small finance banks and other financial institutions on the use of SARFAESI as a tool for recovery.
  • Banks can use SARFAESI for loans as low as ₹1 lakh and above,  NBFCs can use it only for loans above ₹20 lakh.

Concept:

Securities transaction tax (STT)

• STT is a direct tax levied on every purchase and sale of securities that are listed on the recognized stock exchanges in India.
  • Taxable securities include equity, derivatives, and units of equity oriented mutual funds. It also includes unlisted shares sold under an offer for sale to the public included in IPO and where such shares are subsequently listed in stock exchanges.
  • STT is an amount to be paid over and above transaction value and hence, increases transaction value.
• STT is a kind of turnover tax where the investor has to pay a small tax on the total consideration paid or received in a share transaction
• STT is governed by the Securities Transaction Tax Act (STT Act). 
• The term ‘Securities’ is defined in Securities Contracts (Regulation) Act and includes the following:
  • Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.
  • Derivatives.
  • Units or any other instrument issued by any collective investment scheme to the investors in such schemes.
  • Government securities of equity nature.
  • Equity oriented units of mutual funds.
  • Rights or interest in securities.
  • Securitized debt instruments.
    • Hence, securities include all of the above for the purpose of STT levy that are traded on recognized stock exchanges.
• This tax was introduced in Union Budget 2004 and came into effect from October 1, 2004.
• The aim behind the introduction of STT was curbing evasion of capital gains tax on profits earned by transacting in securities.
• The rate of STT is decided by the government and it is similar to a tax paid at the source.
  • Currently, on cash market trades, a STT rate of 0.100 per cent is imposed, while the rate is 0.010 per cent on futures and 0.05 per cent (on option premium) for sale of an option in securities.
• STT is collected by a recognised stock exchange or lead merchant banker in case of an IPO.

Taxation on AIFs

• AIFs operate on a tax pass-through basis for income and losses, but not for expenses.
• Tax pass through status has only been afforded for CAT I and II AIFs and not CAT III AIFs (hedge funds and listed market funds).