Securities Transaction Tax (STT): Meaning, characteristics, and rate

[ecis2016.org] Securities Transaction Tax or STT is a direct tax levied in India on the value of securities transacted in the stock exchange.

Taxpayers often turn to tax evasion strategies in order to reduce the amount of money they must pay to the government in taxes. In order to stop this behaviour, the government must have provisions in the law, adopt new ones or change current ones.

You are reading: Securities Transaction Tax (STT): Meaning, characteristics, and rate

Securities Transaction Tax was introduced in 2004 by the Finance Act as a clear and effective approach to collect taxes on financial sector transactions when individuals began avoiding tax liabilities by not disclosing their earnings on stock sales.

What is Securities Transaction Tax?

A Securities Transaction Tax, abbreviated as STT, is a kind of direct tax that is approved by the central government for both the acquisition and sale of financial instruments. Securities such as equities, derivatives, and units of equity-oriented mutual fund schemes are examples of taxable investments. Additionally, it covers shares that were previously unlisted but were later listed on stock markets as part of an initial public offering (IPO). To put it another way, STT is a fee that must be paid in addition to the value of the transaction itself.

STT is levied in accordance with the Securities Transaction Tax Act. This legislation details the types of securities transfers that are subject to STT and how it is levied. Both buyers and sellers are accountable for paying STT under the STT Act since it specifies the amount of money involved in a transaction and who is responsible for paying it. The rate of the STT, on the other hand, will be set by the government, which may, if required, adjust it periodically.

Characteristics of Securities Transaction Tax

Because the STT was implemented as a method for effectively levying taxes from the finance sector, it has a number of characteristics that set it apart from other tax regimes. 

• It is very important to keep in mind that the STT is only applied to transactions involving the selling of financial derivatives.
• There is a criterion for paying this tax since it only applies to authorised stock exchanges and not to specific individuals. The clearing member is responsible for paying the sum of all STT taxes owed by the trading members he is responsible for clearing.
• The STT on derivatives is calculated based on the actual trading price of the underlying asset. On the other hand, when it comes to options, the additional exchanged value is determined.
• The applicable tax rates for the STT are determined, among other things, by the kind of security. In addition to that, it is contingent on the number of sales or purchases.
• Additionally, the Government of India is in charge of determining the tax rate that would be applied to the STT.

How broadly does the STT apply?

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The Securities Contracts (Regulation) Act of 1956 stipulates that the Securities Transaction Tax (STT) is applicable for the following types of securities:

• Stocks, scrips, shares, bonds, convertible notes, debenture stock, and other liquid assets of a similar sort issued by or on behalf of any corporation or other legal entity
• Futures
• Collective investment scheme units or other instruments are offered to investors.
• Government-issued equity securities.
• Equity-oriented mutual fund units.
• Rights or interests in financial assets.
• Collateralised debt arrangements.

Any transaction that takes place off the market is exempt from STT.

Security Transaction Tax Rate

STT and Income-tax

Tax on earned income

A separate Section 10(38) was enacted at the same time that the STT levy was enacted in 2004. In accordance with the Income Tax Law, any profits on selling shares or Equity-Oriented Mutual Fund assets (EOMF) that are liable to STT are taxable at a beneficial/Nil rate for transactions conducted before March 31, 2018.

In contrast to long-term capital gains, short-term capital gains on such assets are taxed at a subsidised price of 15% if held for less than 12 months. With the aim of preventing certain individuals from abusing the amendment regulations to claim their unexplained income as explicitly excluded long-term investment income through suspicious purchases, the 2018 Finance Budget recommended pulling back the dispensation of long-term capital gains and taxing long-term investment income on share capital and EOMF at a substantial discount of 10% for transfers made on or after April 1st, 2018.

However, benefits that were accumulated up to January 31, 2018, would not be taxed. This means that the value of acquiring shares or EOMF that was paid before February 1, 2018, will be compensated by the share’s or EOMF’s fair value as of January 31, 2018.

Business income tax

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STT paid may be deducted as a business expenditure by a person who trades securities and reports their profits or losses as business income.

STT on the physical delivery of derivatives

In most cases, the settlement of derivative contracts occurs in cash. This implies that the stocks themselves are not exchanged; only the gains are paid to the parties to the transaction. The STT charge on these transactions is 0.001 per cent.

The Securities and Exchange Board of India (SEBI) had, in a communication dated 11/4/2018, provided a list of about 46 equities in terms of which derivative transactions will be paid by means of physical distribution of shares as opposed to cash. On the other hand, there was no consensus reached over the STT rate that would be applicable to deals of this kind.

Stock exchanges now charge a settlement fee of 10 times the amount charged for cash-settled derivative contracts on these transactions, which amounts to an STT of 0.1 per cent (the delivery-based equity share settlement fee). ANMI petitioned the Bombay High Court against the trading platforms in order to rectify the issue of levying 0.1% STT on the shipment of derivatives.

Regarding this matter, the Central Board of Direct Taxes (CBDT) has been contacted by the High Court to provide its feedback. The CBDT clarified on 27 August 2018 that a derivative contract fulfilled by shipment of shares is analogous to the trade in equity shares when the arrangement is satisfied by the real delivery of shares.

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