The Securities Transaction Tax (STT) is a financial transaction tax and works on the same lines as TCS. This is a direct tax levied on transactions of
buying and selling of securities that are listed in recognised stock exchanges within India. STT is governed by the Securities Transaction Tax Act, wherein the categories of securities transactions on which this tax shall be applicable are clearly specified. The taxable entities, in the case of STT, are equities, derivative contracts, or units of equity-oriented mutual funds, shares of unlisted companies offered for sale to the public in the course of an IPO, provided those shares are listed on a recognised stock exchange. Since the payment for the STT has to be made extra, this creates an additional cost for the transaction. As already discussed above, STT is only applicable in taxable transactions of securities. The STT Act has also provided the value of the transactions on which STT is required to be paid and the person who is responsible for paying STT, i.e., either buyer or seller. However, the rate of STT will be decided by the Government and modified from time to time if necessary. It should be noted that the mechanism of collecting the STT is similar to the mechanism of collecting the TCS/TDS. It is essential to highlight that the 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. If such persons are unable to collect the STT, they are liable to pay the amount equivalent to the credit of the Central Government. This is to be paid within the given time limit. Failure to collect and deposit the charged amount will entail interest.
Features of Securities Transaction Tax
STT is a simple and transparent direct tax that is easy to calculate and administer. Some of its key distinguishing features are outlined below.
1. The STT is charged for all sell transactions of futures and options.
2. Futures transactions would be valued at actual trade prices, but options would be valued on the premium paid for them.
3. The STT liability for the clearing member would be computed based on the total STT payable by all trading members carried by it.
Securities on which STT is applicable
Although the term “securities” is not explicitly defined under the STT Act, the Act permits the adoption of definitions from other relevant laws, such as the Securities Contracts (Regulation) Act, 1956 or the Income-tax Act, 1961, where terms are not separately defined. Accordingly, the term “securities”, as defined under the Securities Contracts (Regulation) Act, 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 funds.
- Rights or interest in securities.
- Securitised debt instruments.
When is Securities Transaction Tax levied?
Every buy and sell of equity shares listed within a recognised stock exchange in the country attracts Securities Transaction Tax (STT) at varying rates, as determined by the Government. Furthermore, according to the STT Act, all transactions within the stock exchanges covering equities as well as equity derivatives, including futures, options, and equity derivatives, are taxable. The STT levy occurs once a trade has been completed, which means that the chances of default payment or mispayment of the STT are negligible. Notably, STT contributes to increased costs associated with transactions.
STT charges for different order types
Securities Transaction Tax charges vary based on the order type. Delivery-based equity trades incur 0.1% on both buy and sell sides. Intraday trades attract 0.025% on the sell side only. Futures are taxed at 0.01% (sell side), while options incur 0.0625% when sold and 0.1% if exercised
STT example
Assume a dealer purchases 4,000 shares at Rs 25 per share and later sells them at Rs 35 per share, making the total sale value Rs 1,40,000. If the shares are sold on the same day, the intraday STT rate of 0.025% will apply.
Accordingly,
STT = 0.025% × 35 × 4,000 = Rs 35
Similarly, the applicable STT rate for futures and options is 0.01%. Suppose a trader buys 4 lots of Nifty futures at Rs 18,000 and sells them at Rs 18,020. Assuming each lot consists of 50 units, the STT will be calculated as:
STT = 0.01% × 18,020 × 50 × 4 = Rs 360.40
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
