Analysing the relevancy of Securities Transaction Tax

Neha Koppu [i]


A robust taxation system is the key towards the development of the country’s economy. In India, the tax structure is broadly divided into direct and indirect taxes . There are several kinds of direct taxes imposed while dealing with purchase and sale of securities in the stock market based on the capital gains from the holding period of the securities. However, one such tax which is imposed irrespective of the gains from the transaction i.e., is the Securities Transaction Tax (“STT”).


STT is form of direct tax levied upon purchase and sale of securities in a recognised stock exchange. This tax was introduced in India via the 2004 Union Budget as Chapter VII (Section 96 to Section 105) of the Finance Act, 2004 . Such tax is collected by a recognised stock exchange, a broker, a merchant banker or a prescribe person and is finally deposited with the Central Government. The tax shall be paid irrespective of the profit made. Domestic and overseas investors are treated on same footing for the purpose of STT. The rate of STT depends on the nature of transactions and securities. The rate at which STT is charged differs based on the type of security – for example, purchase and sale of delivery-based equity share is charged at 0.1% while the sale of delivery based equity-oriented fund is charged at 0.01%.


The 2021 budget accommodated a target of 12,500 crores for collection of STT. In September, 2021, the collection of STT exceeded 12,000 crores and is set to surpass the target collection for the year. While the government is overachieving their revenue target for STT, what needs to be discussed is the relevancy of this tax in the first place. This article strives to analyse the relevance of STT in India by tracing the history of STT and allied taxes since its incorporation in 2004 and analysing the various changes and modifications made by the central government.


i. Establishment of STT


The former finance minister, Mr P. Chidambaram introduced STT in order to control the evasion of tax on capital gains. The economic rationale for establishing the concept of STT was to discourage speculative gains. Implementation of such a tax in an economy is said to improve the efficiency of financial markets by reducing speculative activities by a huge number of people. Only a certain category of securities falls under the purview of taxable securities, viz., (i) shares; (ii) derivatives; (iii) equity-oriented mutual funds.

With the rise in number of participants in the stock market, and subsequently, the increase in number of traders and investors, STT was considered as an opportunity to increase tax revenues. STT was introduced as a mode of restraining short-term trading, in order to make the stock market less volatile and more efficient. [i] To reduce short-term trading, 0.025% tax is imposed on intra-day trading. A reduction in short-term trading reduces speculation, making the market less volatile. However, the imposition of STT also lowers the return to savings for an investor. This is because it leads to an increase in transaction costs, which leads to a decline in traded volumes.[ii]


After the incorporation of STT, tax on long term capital gains (“LTCG”) of securities was exempted and further, tax on short-term capital gains (“STCG”) was reduced. Interestingly, the current tax regime subject to securities stands very different and has undergone various changes.


ii. Changes in the last 17 years


As discussed hereinabove, in 2004, once STT was incorporated, the tax on LTCG was exempted under Section 10(38) of Income Tax Act, 1961 (“ITA”), subject to conditions. Moreover, the levy of tax on STCG was reduced to 10% from 20%. Currently, STCG attract a tax of 15% as per the amended Section 111A of the ITA.


In 2004, Section 88E was inserted in the ITA which provided for a rebate for payments made in favour of STT by persons who derived income from “business or profession” and not for persons having income from capital gains. Claiming rebate under Section 88E enabled the assessor to seek a relief from double taxation as the assessor would be paying tax on income derived from the business or profession as well. However, according to an amendment to Section 88E in 2008, rebate is now discontinued.


Section 10(38) provided for an exemption in case of a transfer of a LTCG and gains derived thereof were subjected to STT. The Finance Act, 2017 brought about a change in Section 10(38) according to which the exemption would be provided only if payment of STT took place during the transfer and acquisition of such shares or units of an equity-oriented mutual fund. However, the exemptions allowed were being misused as they were being declared as “unaccounted income” after entering into sham transactions.[iii] Thus, vide the new Section 112A of ITA, inserted by the Finance Act, 2018, the exemption upon LTCG has been withdrawn and LTCG is now subject to a tax at 10% on capital gains exceeding INR 1,00,000. Further, the benefit of indexation was not allowed on LTCG which enables the investor to adjust the purchase price of a security to effectuate the inflation.


In 2019, the Finance Minister Nirmala Sitharaman proposed a relief in the levy of STT by limiting it to solely the difference between settlement price (final price of the asset when options are traded) and strike price (the price at which an investor exercises option) when option is exercised under option trading.


iii. Should it be done away with?


Since the incorporation of STT, various questions have been raised with respect to its necessity and relevance. This part shall deal with three such arguments viz., (i) The negative impact of STT on market volatility; (ii) Increased transactional costs; and (iii) Reintroduction of LTCG on securities in 2018.


One of the main objects of introducing STT in India was to control the market volatility and avoid noise traders (investors who purchase and sell securities based on incorrect/insufficient analysis of the securities). However, there is an ambiguity as to whether the imposition of STT has had any positive impact on the market volatility. Imposition of STT may have, in fact, led to an increase in market volatility as a result of reduction in market liquidity due to increase in transaction costs.

Market participants are hoping for a reduction or removal of STT in India primarily due to the increase in transaction costs. There are several charges such as brokerage, GST, stamp duty, SEBI charges and transaction charges imposed while trading in securities. An addition of STT increases the cost of the securities, placing the financial market at a competitive disadvantage on a global footing. Intermediaries play an important role in maintaining market liquidity, however, with payment of STT, the willingness of the intermediaries to maintain this liquidity gets hindered due to reduced returns and it discourages them from trading, which has an overall effect on maintaining market liquidity. Its adverse impact on price discovery and liquidity are two important factors based on which traders invest in securities, thus resorting to speculation.


It is pertinent to note that when STT was introduced, the tax on LTCG had been removed. However, the tax on LTCG was brought back in 2018 and the relevance of STT has been questioned since. Unlike tax on LTCG, STT does not distinguish between profit or loss, and is payable regardless of the realizations.


vi. Conclusion


In the current tax regime, the objective of imposition of STT seems to be blurry. Notwithstanding the revenue generated by the government, the necessity of STT has been questioned as it has a significant impact on the volumes of trade and cost of transaction. In India, the comeback of taxation on LTCG on securities has drastically stirred the debate of the relevance of STT currently. Since the last three years, investors have been hoping for a removal of STT or a reduction in STT rates.

Removing or reducing the rate of STT would encourage trading, which will improve the revenue collected by the government via direct taxes, SEBI charges/fees and GST. Further, the inflow of foreign investment in India’s derivative market can be increased by abolishing STT, as India would be able to compete with respect to transaction costs when compared with global markets, thereby improving India’s derivative segment ranking in the world. Reintroduction of the rebate under Section 88E under the Income Tax Act, 1961 can alleviate the plight.


[i] Pranti Kumari, Securities Transaction Tax, 187 Taxmann 26 (2010). [ii] Neha Malik, Securities Transaction Tax- Case study of India, 273 ICRIER Working Paper 2 (2014). [iii] Maneet Puri, Final notification on Sec. 10(38) brings clarity, 82 Taxmann 331 (2017).


Neha Koppu is a final year law student at Symbiosis Law School, Hyderabad. Her interests lie in corporate and securities laws. For any discussion related to the article, she can be contacted via email at neha.koppu99@gmail.com.



Analysing the relevancy of Securities Transaction Tax
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