Securities transaction tax revenue surpasses ₹26,000 crore, touches 70% of budget estimate

With stock market indices reaching an all-time high, collection from Securities Transaction Tax (STT) has touched 70 per cent of the budget estimate in just 5 ½ months of the current fiscal year. Last fiscal year, it recorded a growth of over 86 per cent compared to budget estimates.

Now, the expectation is that STT will exceed the budget estimates for the current fiscal.

Data for April 1 to September 17, released by the Income Tax Department, show that collection through STT crossed over 26000 crores as against over ₹13,300 crore mopped up during the corresponding period of last fiscal year, showing a growth of around 96 per cent. The full Union Budget, presented on July 24, set a target of ₹37,000 crore to be collected through STT in the current fiscal. This means more than 2/3rd of the estimate has already been collected.

During the last fiscal year, the budget estimate was ₹27,625 crore, which was revised to ₹32,000 crore, and the actual is expected to be more than that. One reason for the higher collection is not just the continuous bull run but also the heavy volume of trading in the stock market. At the same time, stock-based derivative trading is also on the rise, which also contributed to the collection.

Now, rates on stock-based derivatives (future and option) have been increased for the current fiscal. “Security Transactions Tax on futures and options of securities is proposed to be increased to 0.02 per cent and 0.1 per cent respectively,” Finance Minister Nirmala Sitharaman announced in her budget speech on July 24. This is further expected to boost the collection.

STT was implemented in 2004 by then Finance Minister P. Chidambaram during the first term of the Manmohan Singh Government (2004-09). This tax was intended to combat tax evasion on capital gains. While introducing STT, he had said: “Our founding fathers had wisely included entry 90 in the Union List in the Seventh Schedule of the Constitution of India. Taking a cue from that entry, I propose to abolish the tax on long-term capital gains from securities transactions altogether. Instead, I propose to levy a small tax on transactions in securities on stock exchanges.”

Initial rate was 0.15 per cent of the value of security. Thus, a transaction involving securities valued at, say, ₹1,00,000 attracted a small tax of ₹150. It was said that the tax would be levied on the buyer. He also announced reducing the rate on short-term capital gain to a flat rate of 10 per cent. “My calculation shows that the new tax regime will be a win-win situation for all concerned.,” he had said.

STT is charged on the value of securities (excluding commodities and cash) and mutual fund. After several protests from brokers and trading community members, the government was forced to reduce the amount of taxation for STT in 2013. It is a direct tax, meaning that it is levied directly on the transaction value of securities. This means that the STT is an additional cost that buyers and sellers have to bear, making the transaction more expensive.

It is governed by the Securities Transaction Tax Act, which lists the various types of securities transactions that are taxable. These include equity, derivatives, and units of equity-oriented mutual funds. STT also applies to unlisted shares sold under an offer for sale to the public that is subsequently listed on stock exchanges.