AN INTRODUCTION TO SECURITIES TRANSACTION TAX

ABSTRACT

In the 2004-05 budget, former Finance Minister, P Chidambaram introduced the ‘Securities Transaction Tax’ (STT) for the first time. This drew a tonne of outcry from the market intermediaries, especially among stock brokers and traders, who viewed this as a major hinderance. However, in lieu of enforcing fair market disclosure, the tax obligation had to be imposed, similar to other taxes that are collected or deducted at source (TDS or TCS). The determination of rate of levy of STT in terms of specific securities was done through the Finance Act, 2004, the Securities Transaction Tax Rules, 2004 and subsequent clarifications issued by the Central Board for Direct Taxes, as and when necessary.?

Keywords: Securities Transaction Tax, market intermediaries, fair market disclosure, tax obligation,? rate of levy.

INTRODUCTION

The Securities Contract Act Regulation, 1956 (SCRA), defines securities, encompassing a broad range of financial instruments. These include shares, scrips, stocks, bonds, debentures, derivatives, collective investment schemes, and mutual funds, amongst others. In simpler terms, a security may be defined as a fungible or mutually interchangable financial instrument that holds a particular monetary value, representing ownership in an entity. To enhance the transparency, efficieny and liquidity concerns in the financial markets, it becomes necessary to regulate the realm of such securities. Consequentially, similar to any other asset, tax obligations that are to be served upon transactions relating to securities, and hence, require meticulous regulation. In an effort to prohibit market participants from evading tax obligations on capital gains, the Finance Act of 2004 (hereinafter, the ‘Act’) introduced provisions on ‘Securities Transaction Tax’ or ‘STT’.

WHAT IS SECURITIES TRANSACTION TAX?

Where a seller collects tax from the buyer that is payable by him in the form of ‘tax collected at source’ (TCS), similarly, STT is a direct tax that is levied on a financial transaction revolving around securities. Provisions governing STT are provided under sections 96 to 100 of Chapter VII of the Finance Act, 2004, and the Securities Transaction Tax Rules, 2004 (STT Rules). The category of securities included as taxable therein constitute equity, including sale of unlisted shares sold to the public in an IPO or in subsequent sale, derivatives, and mutual funds. The rate of STT payable is determined by the Government, as mentioned in the statute, ascertaining the person on whom the liability to pay such tax befalls, i.e., the buyer or the seller.?

VALUE OF TAXABLE SECURITIES TRANSACTION

The rate of tax to be charged on the respective securities transactions are provided for in a table under section 98 of the Act. However, it differs from the value of taxable securities transactions, that is determined under section 99 of the Act and Rule 3 of the STT Rules. In relation to an option, a financial derivative giving the buyer the right to sell or buy an asset at a specified price and within a specific period, the value is either the option premium (for seller) or the settlement price (for the buyer), as the case may be. For a derivative transaction involving futures, the trade price determines the value of taxable transaction. For all remaining transactions, the sale or purchase price determines the value of taxable securities.?

LATEST DEVELOPMENT: STT ON PHYSICAL DELIVERY OF DERIVATIVES

Physical delivery relates to an options or future contract, whereby, the actual underlying asset is to be delivered upon a specific date of delivery, instead of a cash-settlement, where only profits are transacted by contracting parties. On 27 August, 2018, the Central Board of Direct Taxes, Government of India, (CBDT), issued a clarification on the position levy of STT on physical delivery of derivatives. A circular was issued on 11 March, 2018, that listed 46 stocks, where the correlated derivative position was to be settled by physical delivery of the shares. However, no rate of STT was declared on these transactions.?

According to section 100(1) of the Act, the duty of collection and recovery of STT befalls every recognised stock exchange. Here, the stock exchange levied an STT of 0.1%, similar to that of a delivery based equity share transaction, instead of 0.001% levied on derivative contracts settled in cash.?

The Association of National Exchange Members of India (ANMI) approached the Bombay High Court in the issue, after being directed by the Securities Appellate Tribunal (SAT) to approach the ‘appropriate forum’. A division bench of the High Court sought the CBDT’s comments on the matter. In response, the CBDT issued its clarification that such transaction would be similar to a transaction in equity shares where the contract is settled by actual delivery of shares, and hence, the correct rate of STT was levied by the stock exchanges.???

CONCLUSION

STT was imposed to replace the lower tax on short-term capital gain (STCG), and the ‘nil’ long-term capital gain (LTCG) tax on equities. Since its implementation, the STT has served as a healthy source of income for the government. The first quarter of 2021 saw an increase of 109% over the first quarter of the preceding year, resulting in a record collection of Rs. 5,373 crore in proceeds.The healthy climb is evidence of the post-pandemic economic recovery that the market is currently treading upon. STT even found a notable mention in the budget for the current financial year, which projected collection of upwards of Rs, 12,500 crores for 2021-22. With the addition of more than a million investors every month on average since the onset of the pandemic, and lucrative? investment opportunities such as the LIC IPO, STT will play a crucial role in maintaining a fair level playing field for all participants.?

RESEARCH METHODOLOGY

This article has been based on a thorough review of the relevant statutes and provisions of law. The rate of tax applicable in the circumstances abovementioned have been stipulated in the appropriate Acts, the corresponding rules and circulars issued by the competent authorities. The aim of this article is to provide a basic overview of the topic to the readers, while introducing them to its need and applicability in specific transactions, and assessing its position, in light of recent developments.??