Introduction
STT, a direct tax levied by the government of India, is imposed on the acquisition and disposal of securities such as equities, options, and futures traded on a recognized stock exchange.
The STT Act came into existence in 2004, simplifying the taxation process of capital market transactions and proving to be a boon for making all capital market transactions transparent.
This article discusses the essential features, applicability, and exemptions under STT , while also examining the implications for investors and market participants .
Securities Transaction Tax (STT)
STT is a direct tax imposed by the central government on the sale and purchase of securities , which may include options, equities, and futures.
STT is levied only upon trades cleared on domestic stock exchanges . Moreover , it applies solely to those trades conducted through recognized stock exchanges within the country. Additionally , it should be noted that STT is not levied on off-market trades.
An act governing this policy is provided by the STT Act of 2004. It came into effect on October 1, 2004, and since then, every trader or investor has been compulsorily liable to pay STT. This has succeeded in simplifying the taxation process in the capital markets of India while trading or investing.
Features of Securities Transaction Tax (STT)
Since STT was imposed as a tax levied on the financial market to collect taxes effectively, it has certain distinguishable features.
Features of STT are as follows:
It is, however important to note that STT is only charged on options and futures on sell transactions.
This tax is paid by the clearing member, and he has to pay in total the entire STT taxes for the trading members under him. There is criterion; it only applies to recognized stock exchanges and not to the individual members.
Futures on STT-the actual traded value is priced. Options-premium traded value.
The STT is taxed based on the type of security, as well as the sales or purchases.
Besides, the rate of tax for STT shall be determined by the Central Government of India.
Applicability of Securities Transaction Tax (STT)
STT is applicable to almost every type of security traded in Indian stock exchanges. Here is an overview of applicability across various types of securities and transactions.
Equity Share:
Intraday Trading: Only the selling side of intraday equity trades, or shares in which trades are executed during the trading day without delivery, is subject to STT.
Delivery-based Trading: Here STT is payable on both purchase and sale of share when the shares are held for a period of one day or more.
Derivatives:
Equity Futures: STT is charged only on equity futures contracts sold.
Equity Options: The STT is charged only at the sale side upon exercise of the option.
Mutual Funds:
Equity-Oriented Mutual Funds: STT shall be levied on both purchase and sale of units of equity-oriented mutual funds, if purchased or sold on a recognized stock exchange. In case of off-market sales (that is, direct to the fund house), STT will be levied only on the redemption/ sales of units.
Other Securities:
Exchange-traded funds (ETFs): Since these are traded in the same manner as equity shares, they qualify under the delivery-based trading definition of STT.
Debentures, Bonds, and Mutual Funds-based on Non-Equity: These are largely exempted from STT as they deal with non-equity-based securities.
Exemption from Securities Transaction Tax (STT)
Though STT is generally applicable to transactions in securities, some exemptions are provided so that certain transactions or specific groups are not unduly obstructed by this tax or burdened unnecessarily. These exemptions include:
Off-Market Transactions: Transactions outside a recognized stock exchange, include direct transfers from one person to another and purchases outside an exchange through mutual funds. All these also exempt from STT but may be liable to capital gains tax.
Debt Securities: STT is not applicable on debt instruments, which include bonds, debentures, and fixed income mutual funds as they are not equity-oriented products.
Certain Corporate Action: STT also cannot be applied on transfers of securities as a result of certain corporate action like mergers, acquisitions, or restricting. The exemption is necessary to prohibit STT from dampening valid business transactions.
Offshore Derivative Instruments: Some derivative instruments issued by Foreign Institutional Investors, such as Participatory Notes (P-Notes), are exempted from STT. This has been done to enable and facilitate investment flows from foreign investors.
Gifted Securities: If securities are given away, not sold to family or friends, typically this transaction is not subject to STT. A capital gains tax or a gift tax will be payable at such time as such security is sold by the recipient.
Government Securities and Sovereign Gold Bonds: As the government bond or sovereign gold bonds, issued by the government, are exempted from the purview of STT, the same is because the government has encouraged, as part and parcel of its policy, investment in such schemes without further transaction costs.
Summary
By standardizing tax collection on securities traded in the financial market in India, Securities Transaction Tax plays an important role. Although widely applicable to different types of securities , there are exemptions considered to strike a balance and fairness of taxation for off-market transactions as well as government-issued securities. Understanding STT thus guides investors on tax implications and contributes to making capital markets streamlined and efficient.