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 law
or introduce new provisions / modify the existing ones in order to curb
this practice.
When people started evading tax on capital gains 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
means of clean and efficient way of collecting taxes from financial
market transactions.
What is Securities Transaction Tax
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 recognized stock
exchanges in India. STT is governed by Securities Transaction Tax Act
(STT Act) and STT Act has specifically listed down various taxable
securities transaction i.e., transaction on which STT is leviable.
Taxable securities include equity, derivatives, 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 transaction.
STT Act has also provided for value of transaction on which STT is
required to be paid and person who is responsible to pay 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 Central Government within 7th of the following month.
Further, failure to collect or, remit whatever has been collected will
result in levy of interest and penal consequences too.
Scope of the term ‘securities’ liable for STT
While the term ‘securities’ is not
defined under STT Act, STT Act specifically allows borrowing of
definition of such terms not defined in STT Act but defined in
Securities Contracts (Regulation) Act, 1956 or Income-tax Act, 1961. 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 fund.
Rights or interest in securities.
Securitized debt instruments.
Hence, securities include all of the above the purpose of STT levy
that are traded on recognized stock exchange. Off-market transactions
are out of the purview of STT.
Levy of Securities Transaction Tax
| Taxable securities transaction | Rate of STT | Person responsible to pay STT | Value on which STT is required to be paid |
| Delivery based purchase of equity share | 0.1% | Purchaser | Price at which equity share is purchased* |
| Delivery based sale of an equity share | 0.1% | Seller | Price at which equity share is sold* |
| Delivery based sale of a unit of oriented mutual fund | 0.001% | Seller | Price at which unit is sold* |
| Sale of equity share or unit of
equity oriented mutual fund in recognised stock exchange otherwise than
by actual delivery or transfer and intra day traded shares | 0.025% | Seller | Price at which equity share or unit is sold* |
| Derivative – Sale of an option in securities | 0.017% | Seller | Option premium |
| Derivative – Sale of an option in securities where option is exercised | 0.125% | Purchaser | Settlement price |
| Derivative – Sale of futures in securities | 0.01% | Seller | Price at which such futures is traded |
| Sale of unit of an equity oriented fund to the Mutual Fund – Exchange traded funds (ETFs) | 0.001% | Seller | Price at which unit is sold* |
| Sale of unlisted shares under an
offer for sale to public included in IPO and where such shares are
subsequently listed in stock exchanges | 0.2% | Seller | Price at which such shares are sold* |
| PURCHASE OF UNITS OF EQUITY ORIENTED MUTUAL FUNDS | NIL | PURCHASER | NA
|
STT on a physical delivery of Derivatives – CBDT clarification dated 27 August 2018
Derivative contracts are generally settled in cash which means,
stocks are not physically delivered and only the profits are paid and
received by the contracting parties. These transactions, as given in
the table above, are subject to an STT levy of 0.001 percent. However,
SEBI had in its Circular dated 11.4.2018 listed around 46 stocks, in
respect of which derivative contracts would be settled by way of
physical delivery of shares as against cash. However, no clarity
emerged on the rate of STT that would apply to these kinds of
transactions.
Further, for such transactions, the stock exchanges began to levy an
STT of 0.1 percent (this is the rate of STT for delivery based equity
share transaction), which is almost 10 times of what is levied for
derivative contracts settled in cash. Hence, a petition was lodged by
the Association of National Exchange Members of India (ANMI) against
the stock exchanges before the Bombay High Court to address the
aforementioned concern of levy of 0.1 percent of STT on physical
delivery of derivatives.
The High Court has sought the comments of the Central Board of
Direct Taxes (CBDT) in this regard. The CBDT, in response, has issued a
clarification dated 27 August 2018, where it has observed that where a
derivative contract is being settled by physical delivery of shares,
such transaction would be similar to a transaction in equity shares
where the contract is settled by actual delivery of shares. Therefore,
the STT rate as applicable to delivery based equity transactions would
apply to such derivative transactions too.
Posted by Aashima
(Team TaxaJ)