Securities Transaction Tax (STT)-

Features, Tax Rate & Applicability

It is quite common for taxpayers to resort to tax-evading measures to save
their tax outflow to the Government. It is necessary for the Government to
keep a tab on such measures by having provisions in the law or
introducing new provisions / modifying the existing ones in order to curb
this practice. When people started evading capital gains tax by not
declaring their profits on the sale of stocks, the Finance Act, way back in
2004, introduced a tax called the Securities Transaction Tax (STT) as a
clean and efficient way of collecting taxes from financial market
transactions.

What is Securities Transaction Tax (STT)?

STT is a kind of financial transaction tax which is similar to tax collected at
source (TCS). STT is a direct tax levied on every purchase and sale of
securities that are listed on the recognised stock exchanges in India. STT
is governed by the Securities Transaction Tax Act (STT Act), and the STT
Act has specifically listed down various taxable securities transactions i.e.,
transactions on which STT is leviable.

Taxable securities include equity, derivatives, and unit of equity-oriented

mutual fund. 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.

As already mentioned, STT is leviable on taxable securities transactions.

STT Act has also provided the value of the transactions on which STT is
required to be paid and person who is responsible for paying STT i.e.,
either buyer or seller. However, rate of STT will be decided by Government
and modified from time to time if necessary.

Provisions of collection of STT works similar to TCS or TDS. STT is

required to be collected by a recognised stock exchange or by the
prescribed person in the case of every mutual fund or the lead merchant
banker in the case of an initial public offer, as the case may be, and
subsequently payable to the Government on or before the 7th of the
following month. In case the above persons fail to collect the taxes, they
are still obliged the discharge an equivalent amount of tax to the credit of
the Central Government within the 7th of the following month. Further,
failure to collect or remit whatever has been collected will result in a levy
of interest and penal consequences too.

Features of Securities Transaction Tax

STT is a straightforward direct tax that is simple to compute and impose.
Some of STT's most distinguishing characteristics are given below.

1. An STT charge is applied on all sell transactions for options and futures.
2. For the purposes of STT computation, each ‘futures’ trade is valued at
the actual traded price, whereas each option trade is valued at the
premium.
3. The amount of STT that a clearing member must pay is the aggregate
of all STT taxes owed by trading members under him.

Securities on which STT is Applicable

While the term ‘securities’ is not defined under the STT Act, the STT Act
specifically allows borrowing of the definition of such terms not defined in
the STT Act but defined in the Securities Contracts (Regulation) Act, 1956
or Income-tax Act, 1961. The term ‘Securities’ is defined in the 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 corporates.
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.
Securitised debt instruments.

Hence, securities include all of the above and are traded on the
recognized stock exchange for the purpose of STT levy. Off-market
transactions are out of the purview of STT.

Levy of Securities Transaction Tax in India

Person Value on
Rate of responsible which STT
Taxable securities transaction
STT for paying is required
STT to be paid
Price at
which
Delivery-based purchase of equity share 0.1% Purchaser equity
share is
purchased*
Price at
which
Delivery-based sale of an equity share 0.1% Seller equity
share is
sold*
Price at
Delivery-based sale of a unit of oriented mutual fund 0.001% Seller which unit
is sold*
Price at
Sale of equity share or unit of equity-oriented mutual fund in a which
recognised stock exchange otherwise than by actual delivery 0.025% Seller equity
trading as business income, STT paid is allowed to be deducted as
business expense.

When Is Securities Transaction Tax Levied?

Each purchase and sale of shares listed on a domestic and recognised
stock market is subject to a securities transaction tax. The government
determines the taxation rate. Under the STT act, all stock market
transactions involving equities or equity derivatives such as futures and
options are subject to taxation. When a share transaction is completed,
STT is levied. As a result, STT is quick, transparent, and effective.
Because the tax is imposed as soon as the transaction occurs, incidents
of non-payment, incorrect payment, and so on are minimised to a bare
minimum. However, the net effect is that it raises the cost of the
transactions.

Impact of STT on Investors and Traders

The securities Transaction Tax (STT) impacts the investors and traders in
the following manner:

Increased Cost of Transaction- As STT is the additional cost levied on

buying and selling of securities, it increases the cost of traded securities.
Also, when the volume of transactions is large, the STT cost becomes
significantly greater and affects the overall profitability of the investors.

Reduced Trading Volumes: To some traders, the additional cost of STT

may discourage them from investors investing in smaller volumes due to
the increased cost and hence resulting in decrease of liquidity.

Shift in Trading Strategies: The investors may change their trading

strategies to take the advantage of the securities where STT rates are
lower.

Impact on Mutual Fund Investors: The impact of STT on mutual fund

investors are low but it decreases the Net Asset Value (NAV) of the funds.
This leads to reduction in profits to investors.

Benefits of STT
The benefits of STT are discussed below:

Prevents Tax evasion: STT is similar to Tax Collected at Source (TCS). It

wil let the government to keep track of the transactions on stock
exchange and curb tax evasion.

Discourage speculative trading: As STT is the additional cost while

making sell or purchase transaction on securities, the traders decreases
the speculative trading due the increased cost of STT. This results in less
market volatility and beneficial to investors.

STT Example
Assume a dealer purchases 5000 shares worth Rs.10,000 at Rs.20 per
share and sells them at Rs.30 per share. If the trader sells the shares on
the same day, the intraday STT rate of 0.025% will apply.

As a result, STT = 0.025%*30*5000 = Rs.37.5.

Similarly, the appropriate STT for futures and options is 0.01%. If a trader
buys 5 lots of Nifty futures at Rs.5,000 and sells them at Rs.5,010, the STT
is calculated as follows:

STT = 0.01%*5010*50*5 = Rs.125.25

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