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Securities Transaction Tax (STT)

Securities Transaction tax was first introduced under the Finance Act, 2004. The tax as stated under Chapter VII of Finance Act, 2004 extends to the whole of India. It is a tax on taxable securities transaction. It is a very easy tax to calculate. No complexity is involved in the calculation of STT as one has to apply the prescribed percentage on the value of transactions. It was introduced to avoid tax evasion resulting from capital gains. During earlier times, many taxpayers didn’t declare their profits from the sale of securities and avoided paying capital gains tax. Due to the scenario specified, the government could tax only those profits that had been declared in the tax returns. This would result in a loss of revenue to the government. There is no way to avoid it now as brokers have to automatically add this tax to the transaction price.

Introduction of STT has led to the abolition of long-term capital gains on stock and equity mutual funds. However, in the current scenario, the rules for taxation of long-term capital gains have changed. Securities where the transactions of which are taxable under STT are defined under the Securities Contract (Regulation) Act, 1956.

What is STT?

It is a kind of turnover tax wherein one has to shell out a small amount on the amount received or payable in a share transaction. STT, applicable in case of intraday, shall be different from STT applicable in case of the delivery transaction. Such tax is levied either on sale or purchase transaction. It is similar to tax collected at source. Every transaction of purchase and sale of securities that are listed on recognized stock exchange attract the securities transaction tax. However, such transaction of purchase and sale shall be included in the definition of a taxable securities transaction.

Scope of STT

The most important point about securities transaction tax is that it is applicable only on those share transactions that are made through a recognized stock exchange in the country. Share transactions which are done on an unrecognized stock exchange are not covered under STT. The tax rates for different types of securities vary. It is charged on the transaction value of:

  • listed equity shares, bonds , debentures
  • derivatives
  • equity oriented fund, options and futures,
  • instruments issued by collective investment scheme.
  • security receipt as defined in the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

Computation of Securities Transaction Tax

Taxable securities transactionRevised rate from 01.06.2016Payable by
Sale of option 0.05 per centSeller
Sale of an option, where option is exercised0.125 per centPurchaser
Sale of a futures 0.01 per centSeller
  • In case of sale of an option in securities, value of securities that are taxable shall be option premium.
  • In case of sale of an option in securities, where option is exercised, value of taxable securities transaction shall be the settlement price.

Levy of STT

STT is a direct tax and is levied by Central Government. It is not a state-based tax. A transaction is taxed as soon as the process is completed. It helps to bring transparency in the system. The tax charged increases the cost of transactions.

Income Tax and STT

Taxation on income gained from security transaction shall depend upon the intention or the purpose of the taxpayer. A person shall deal in shares either due to the business purpose or to create investments. STT shall be payable under both cases.

Case 1: Income from business or profession

Under this case, the taxpayer shall be engaged in the business of trading in securities. That shall be his core business. If trading is for business purposes, the same shall be taxed under Income from the business. Losses suffered and gains made both shall be dealt under business income and income tax will be calculated accordingly. A rebate u/s 88E for the amount of STT paid was allowed until 31.03.2008. The same is not available anymore. Currently, the deduction of STT paid is available under section 36 of the Act.

Case 2: Income from Capital Gains

In this scenario, as specified, the assessee is a salaried person or is trading in securities, not with the intention of carrying it out as the main business activity. If it is done with an intention to create wealth and short-term profits, then profits and losses shall be classified under Capital gains. Depending upon period of holding of securities, capital gains shall be classified as long term capital gain or short term capital gains. Tax rates under Income tax act vary for both cases. Short term capital gain tax shall be levied @ 10% u/s 111A and long-term capital gain tax shall be levied u/s 112 or 112A, depending upon the case.

Collection of STT

Such tax is collected during any calendar month of the year. The tax so collected shall be paid to the credit of Central Government by the 7th day of the month immediately following the month in which it is collected.

Conclusion:

STT will stay and cannot be avoided whether it is the purchase and sale of shares or mutual fund units. At the end of the year, one can ask his broker to give you a certificate of the STT that you have paid through the year. You can use this amount to claim a deduction as your business expense.

Frequently Asked Questions

What is Taxable Securities Transaction?

Purchase or sale of

  • an equity share in a company done through a recognized stock exchange;
  • derivative or a unit of an equity oriented fund, only if entered into in a recognized stock exchange;
  • unlisted equity shares by any holder of such shares under an offer for sale to the public included in an initial public offer and where such shares will be subsequently listed on a recognized stock exchange;
  • A unit of an equity oriented fund.

Who collects the tax?

  • In case of transactions done through recognized stock exchange, the stock exchange shall collect the tax from a person, being a buyer or seller in that stock exchange.
  • With regards transactions relating to units of mutual fund, the prescribed person in the case of every Mutual Fund shall collect the securities transaction tax.
  • In respect of an initial public offer, the lead merchant banker appointed by the company shall collect the securities transaction tax.

Will STT have any effect on capital gain tax liability?

STT cannot be claimed as part of a purchase cost and it will not help to reduce the capital gain liability. However, the tax payer can claim it as business expense by persons trading in such securities.

Whether any information has to be provided to the tax officials by the person collecting STT?

Every recognized stock exchange and prescribed persons shall, after end of every financial year, prepare and deliver a return in such form and manner as stated to the Income tax authorities. Such form shall comprise of all taxable securities transactions entered into during such financial year in that stock exchange or, as the case may be.

What is the Interest on delayed payment of securities transaction tax?

Every person who fails to credit the securities transaction tax to the account of the Central Government within the period specified shall be liable to pay simple interest at the rate of one per cent of such tax for every month or part of a month by which such crediting of the tax or any part thereof is delayed.

Is any penalty leviable on delayed payment of STT?

Any person who fails to collect or deposit to the credit of Central Government shall be liable to pay penalty in addition to the amount of interest as stated above. Penalty shall be equal to one thousand rupees a day for the period in which default continues. However, it shall not exceed the amount of STT that it has failed to pay.

What is the punishment for failure to furnish returns for STT?

A sum of one hundred rupees for every day during which the default continues that is return has not been filed will be charged as penalty.

What will be the amount of penalty if there is delayed payment of STT of Rs 1, 25,000/- for a period of 20 days?

The amount of penalty chargeable shall be Rs. 1,000 per day * 20 days of default. Penalty amount shall not exceed tax payable. Therefore, penalty charged will be 20,000/-

What information is provided to the member?

A report is provided to the members at the end of each trading day. The report contains information on the following:

  • total STT liability,
  • trading member wise STT liability,
  • client wise STT liability and
  • Detailed computations to determine the STT liability (client wise).

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