Income Tax

Understanding the concept- Securities Transaction Tax (STT)

Some taxpayers resort to measures of tax evasion to save their outflow to the government. Therefore the government keeps a tab on such practices by deploying adequate provisions in law or introduce such provisions in law to curb this practice. In 2004, the Finance Act introduced a tax by the name of Securities Transaction Tax as a means to efficiently collect taxes from financial market transactions.

Securities Transaction Tax- Meaning

This tax is a form of financial transaction tax that is identical to the tax collected at source. It is a direct tax which is levied on every purchase and on sale of securities that are listed on stock exchanges in India. This tax is governed by the Securities Transaction Tax Act, and this Act has listed down different taxable securities transaction.

Taxable securities include the following:

• Equity;
• Derivatives;
• Unit of equity oriented mutual fund;
• It also includes unlisted shares sold under an offer for sale to public included in the IPO and where the shares are consequently listed in stock exchanges. 

Securities Transaction Tax has to be paid over and above transaction value and therefore enhances transaction value. It is liable to be levied on taxable securities transaction. The Act has also provided for transaction value on which this tax should be paid and person who is required to pay this tax (buyer or seller). The rate of this tax is decided by the government and is modified time and again, if needed. 

Provision of collecting Securities Transaction Tax (STT)

It may be noted that the provision of collecting this tax is similar to TCS/TDS. It should be collected by a recognized stock exchange or should be collected by the person prescribed in case of every mutual fund or lead merchant banker in case of an IPO, as per case to case, and is payable to the government on or before 7^th day of the following month.

If the above mentioned persons fail to collect taxes, they are still obliged to discharge an equivalent amount of tax to the Central government credit within 7^th day of the following month. It may be noted that in case of failure to collect or remit that which has been collected, would result in levy of interest and penal actions.

Securities liable for STT- Scope

Securities has not been defined under the STT Act^[1], but the act specifically permits borrowing the definition of such terms that are not defined in the STT Act but defined in the Securities Contracts (Regulation) Act, 1956 or Income Tax Act 1961.

Securities is defined in the Securities Contracts (Regulation) Act and includes:

• Shares, scrips, stocks, debentures, bonds, debenture stock or other marketable securities of a like nature or of any incorporated company or other body corporate;
•  Derivatives;
• Units or any other instrument issued by a collective investment scheme to investors in such schemes;
• Government securities of equity share;
• Rights or interest in securities;
• Equity oriented units of the mutual fund;
• Securitized debt instruments.

Therefore securities include all of the above. Off-market transactions are not within the purview of STT.

Securities Transaction Tax Rate

As stated earlier, the rate of tax for STT is determined by the government and depends upon the security type and on the fact that the transaction is sale or purchase. The table made below shows the rate at which securities are taxed.

Securities Transaction Taxable-	Taxation Rate-	Payable by-
Sale of an option in securities	0.017%	Seller
Sale of an option in securities, where option is exercised	0.125%	Purchaser
Sale of futures in securities	0.01%	Seller

This can be refined further to include details regarding the type of securities. This is explained below.

Type of Taxable Securities	Transaction type	STT Applicable
Delivery based equity shares	Purchase	0.125% on total value
Equity oriented mutual funds	Redemption of units	0.25
Equity mutual funds units, equity shares and intra-day traded shares	Purchase	Nil
Derivative-Sale of option	Sale	0.017%
Derivative-Sale of futures	Sale	0.017%

Securities Transaction Tax and Income Tax

Taxation on money made through share market trading depends upon the purpose for which share transactions are done. An individual may share trade shares for business purpose or as an investment activity. In both cases, STT levied by the government differs. Based on this, following heads can be differentiated.

• Income from capital gains-

It is applicable when the assessee is a salaried or a self employed person who deals in stock transactions for investment purposes only, and trading in securities is not his primary profession. Gains of losses in such instances may be grouped as short term capital gains or can be grouped as long term capital gains based on the period for which the stocks are held.

• Income from share trading as a profession-

This occurs when the income from trading of stocks is made as a professional choice and is being carried out from business viewpoint. In such instances, the losses and gains from share trading is classified as business income. It is then taxed at regular income tax rates determined by the government. STT paid on income from taxes will then be claimed as deduction under Section 36 of Income Tax Act.

Conclusion

Securities Transaction Tax is a simple direct tax and isn’t very difficult to calculate or levy. This tax has some distinguishing features.

Read our article: How does Income Tax Department trace your High Value Transactions?