Securities Transaction Tax (STT)
Securities Transaction Tax (STT) is a type of financial transaction tax levied in India on transactions done on the domestic stock exchanges. The rates of STT are prescribed by the Central / Union Government through its Budget from time to time. In tax parlance, this is categorised as a direct tax.
The STT came into effect from October 1, 2004 pursuant to the enactment of the Finance Act, 2004 and notification of Securities Transaction Tax Rules, 2004 by the Government of India. Vide Finance Act, 2016 it was stipulated that transactions carried out in a recognized stock exchange located in an International Financial Center, where the payments are carried out in terms of foreign currency, would be exempt from the payment of STT and capital gains.
With charging of STT, long term capital gains tax was made zero and short term capital gains tax was reduced to 10% (subsequently, changed to 15% since 2008). (See Income Tax Department’s tax payers’ information series on capital gains tax). However, w.e.f. 1 April 2018, the long term capital gains tax has been brought back @10% for those gains exceeding Rs. 1 lakh without any benefit of adjusting for inflation. (See Finance Act 2018).
The STT framework was subsequently reviewed by the Central Government in the year 2005, 2006, 2008, 2012and 2013. The STT rates were revised upwards in the year 2005 and 2006 while it was reduced for certain segments in 2012 and 2013.The STT provisions were altered in the year 2008 such that for professional traders (brokers),STT came to be treated as an expense which can be deducted from the income instead of treating the same as an advance tax paid. (The 2004 STT provisions provided that the STT payments of professional traders, whose “business income” arising from purchase and sale of securities could be set off against their total tax liability.) In 2016, Union Budget proposed to increase security transaction tax in case of ‘Options’ from 0.017 to 0.05 percent. Some minor modifications on settlement of options was carried out in the Finance Act 2018.
As on date, STT is not applicable in case of preference shares, Government securities, bonds, debentures, currency derivatives, units of mutual fund other than equity oriented mutual fund, and gold exchange traded funds and in such cases, tax treatment of short-term and long-term gains shall be as per normal provisions of law. Transactions of the shares of listed companies on the floor of the stock exchange or otherwise, mandated under the regulatory framework of SEBI, such as takeover, buyback, delisting offers etc also does not come under STT framework. The off-market transactions of securities (which entails changes in ownership records at depositories) also does not attract STT.
In India, STT is collected for government of India by the stock exchanges.
See Table 3.1 in the research report The Tobin Tax: A Review of the Evidence of the Institute of Development Studies (Vol 2011, No 68, May 2011) for a comparison of transaction taxes applicable on securities in major economies.