What is the STT (Securities Transaction Tax) all about?
Securities Transaction Tax (STT) is a type of direct tax that is payable on the total value of securities and stock exchanges in India. Up to 2016, it constituted 0.1% of the delivery based equity trading. These taxes do not include the transactions that are made on a non recognized stock exchange. Also, commodity and currency transactions are barred from STT.
Securities Transaction Tax came up in the year 2004, introduced by the then Finance Minister, P. Chidambaram. This was introduced to prevent tax evading. Later, the STT was revised to establish taxes constituting 0.1% of the total turnover. The rates of STT are different based on whether the equity shares have been bought or purchased. With the new amendment coming up, the STT has been reduced to 0.01% on the sell-side only for Futures while reduced to 0.05% only for the Equity options. While for the rest of the tax structures, they remain constant.
The STT is levied by the Union Government of India from the dealers. All the rates are decided by the Central Government itself. Surprisingly for the Securities Transaction Tax, the Securities Regulation Contract Act was established long before in the year 1956 to provide provisions to the securities taxes under this. The provisions for the collection of STT are the same as those concerning the TCS and the TDS.
Generally, the STT is calculated by a recognized stock exchange or by the prescribed person in the case of Mutual Funds. These are payable to the Government on or before the 7th day of the following month. In case the prescribed person fails to collect the taxes, the taxpayers should still pay the taxes equivalent to the calculated taxes within the 7th day of the following month. Failure to do so may result in the levying of heavy interests and even penalties.
What are the Scopes in 'Securities' that become liable for the STT?
The term ‘Securities’ as per the definition in the Securities Contract (Regulation) Act includes those assets that are liable for Securities Transaction Tax. These constitute the following:
- Bonds, stock shares, scraps, debenture stock, or any other securities that can be marketed or are of a similar nature to this.
- Any Derivatives or units that have been obtained by the collective investment schemes.
- Any securities under the Government that are of an equity nature.
- Units of the mutual funds that are equity-oriented.
- Securities that contain personal rights or interests.
- The debt instruments that are under security
So, we see that 'securities' is a wide term when it comes to Securities Transaction Tax (STT). The STT includes all of the above securities that are recognized by the stock exchange when it comes to levying taxes.
How is the Securities Transaction Tax levied?
The Securities Transaction Taxes are levied at a specific interest for each section according to the Security Contract Act by certain people, a buyer or a seller, on a particular value. These taxes are not random but actually calculated carefully.
| Securities that come under the Securities Contract Act |
Rate counted on each security |
The taxpayer who should pay this STT |
The total value on which the Securities Transaction Tax is paid |
| Purchase of Equity shares that are delivery-based |
Charged 0.1% |
Paid by the buyer |
On the total price of the equity share at which it was purchased |
| Sale of Equity shares that are delivery-based |
Charged 0.1% |
Paid by the seller |
On the total price of the equity share for which it was sold |
| Sale of a unit of oriented mutual funds that are delivery-based |
Charged 0.01% |
Paid by the seller |
On the total price of the equity share for which each unit is sold |
| Sale of an option in security derivatives |
Charged 0.017% |
Paid by the seller |
On the total value of option premium |
| Sale of an option in security derivatives where the option is exercised |
Charged 0.125% |
Paid by the buyer |
On the total value of the settlement price |
| Sale of futures in option derivatives |
Charged 0.01% |
Paid by the seller |
On the total value at which the futures are traded |
| Sale of equity funds or the oriented mutual fund in recognized stock exchange which are not traded by actual delivery or by transfer and intra-day shares |
Charged 0.025% |
Paid by the seller |
On the total amount at which the equity share or equity unit is sold |
| Sale of a unit through Exchange-traded funds (ETFs) when equity funds are changed into mutual funds |
Charged 0.001% |
Paid by the seller |
The total amount at which the unit is sold |
| Sale of unlisted shares to the public and have been included in IPO to be listed in stock exchanges |
Charged 0.2% |
Paid by the seller |
The total amount at which the shares are sold |
| Purchase of unit equity placed under mutual funds |
Nil |
Paid by the buyer |
Not Available |
For a piece of more detailed information regarding how the taxes are calculated on equity funds, you can refer to Rule 3 of the STT RULES, which was established in the year 2004.
How are the Securities Transaction Taxes Counted on Physical Delivery of Derivatives?
On the 27th day of August in 2018, the CBDT clarified regarding certain rules for the Physical Delivery of Derivatives. This derivative contract is generally paid in cash for those stocks which have not been physically delivered.
- STT (Securities Transaction Tax) applies to physical settlements of derivative contracts. It's important to understand that most derivative contracts are settled in cash, meaning there's no exchange of actual stocks, only the difference in value. In these cases, STT is minimal (0.001%).
- Rate of STT on Physical Delivery:
Here's the key point: The STT rate for physical delivery of derivatives is 0.1%, which is significantly higher than the rate for cash-settled contracts. This higher rate is the same as the STT for regular delivery-based equity transactions.
- Dispute and Clarification:
Initially, there was some ambiguity regarding the STT rate for the physical delivery of derivatives. The stock exchanges started levying 0.1% STT, but the Association of National Exchange Members of India (ANMI) challenged this in court.
Finally, the Central Board of Direct Taxes (CBDT) clarified that physical delivery of derivatives would indeed be subject to 0.1% STT. This brought certainty to the process.
STT and Income Tax: A Brief History (Before April 2018)
In 2004, the introduction of the Securities Transaction Tax (STT) came alongside a taxpayer benefit in Section 10(38) of the income tax law. This section offered an advantage for capital gains on the sale of shares or EOMFs that were subject to STT. Up until March 31, 2018, any capital gain on such securities enjoyed a beneficial tax rate, often resulting in zero tax liability.
Tax Rates Before April 2018:
- Long-Term Capital Gains (Held > 12 months): These gains were completely exempt from tax.
- Short-Term Capital Gains: These gains were taxed at a concessional rate of 15%.
Reason for Changes: Addressing Potential Abuse
The government expressed concerns about the potential misuse of these exemption provisions. Some individuals might have been declaring unaccounted income as long-term capital gains to avoid taxes by engaging in "sham transactions."
Changes Implemented in April 2018 Budget
The Finance Budget of 2018 aimed to address these concerns by revising the taxation structure for long-term capital gains on shares and EOMFs. Here's a breakdown of the changes:
- Long-Term Capital Gains Tax Introduced: The previous exemption for long-term capital gains was withdrawn.
- New Tax Rate for Long-Term Capital Gains: A new, concessional tax rate of 10% was introduced for long-term capital gains on shares and EOMFs. This rate applies to transfers made on or after April 1, 2018.
Grandfather Clause for Pre-2018 Acquisitions
The budget offered some relief for those who had already invested in shares or EOMFs before February 1, 2018. A "grandfather clause" was implemented:
- Grandfather Clause Explained: In the case of transfers made up to January 31, 2018, the cost of acquisition for shares or EOMFs acquired before February 1, 2018, is adjusted. This adjustment replaces the original purchase price with the fair market value of the asset as of January 31, 2018. This can potentially reduce the taxable capital gain for pre-existing holdings.
Taxation of Trading Income and STT
The concept of STT remains relevant for those who trade in securities as a business. If someone reports the income/loss from such trading as business income, the STT paid on those transactions is allowed to be deducted as a business expense. This helps offset the taxable income from their trading activities.
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