To stop the avoidance of capital gains tax, Securities Transaction Tax was introduced in India few years ago. Many people never declared their profits when they sold their stocks to avoid paying the capital gains tax. So, the government could only tax those profits which are declared by the people.
To stop this confusing situation, Finance minister P.Chidambaram in the Union Budget of 2004-05, had introduced Securities Transaction Tax. All the transactions happening under stock, index options and futures are subject to transaction Tax. An individual has to pay tax when he buys or sells a stock and that tax gets added to the price of the share when the transaction will be made. The brokers would be automatically adding this tax with the transaction price; thus, it becomes impossible to avoid it.
The rates are:
- 017% on sale of an option in securities payable by the seller
- 125% on sale of an option in securities, where option is exercised payable by the purchaser
- 01% on sale of a futures in securities payable by the seller
With the support of the finance ministry, the introduction of STT was done to simplify the tax routine on the financial securities transactions. The ministry claims that the STT is an efficient and clean mode of accumulating tax from the market transactions. An easy to administer, clean, neat and efficient is STT has one big benefit of virtually compelling the people to pay tax and eliminate its avoidance.
STT is imposed on all purchases and sales of securities which are listed on the stock exchanges of India. This includes all the equities, debts or even the equity-oriented mutual funds. The tax rate is determined by the government and varies with diverse securities and its transactions. At source deductions happen of STT by the AMC or the broker at the time of the transaction and it pushes up the cost of the whole transaction undertaken.
Beneficial for professional traders
All the professional traders engaged in the trading business can claim the tax rebate in Securities Transaction Tax. The income that they earn through trading can be shown as business income and can easily get a tax rebate on STT based on section 36 provision under Income Tax Act. But other investors who trade in securities and show their income as capital gains cannot get the Tax rebate on STT.
Scope of STT
- With respect to the Securities Contracts Act (Regulation), 1956, STT is applicable on bonds, debentures, shares, debentures stocks and other marketable securities of any incorporated company or even a body corporate.
- Derivatives are also considered under STT.
- Units or instruments which are assigned by collective schemes to investors are also taken into consideration.
- As defined under the section 2 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFESI), 2002, the security receipt will also be taxed.
- All the government securities with equity-like characteristics.
- All the rights and interests in the securities.
- Even the equity oriented mutual funds,
- The off-market transaction will not be considered for the imposition of STT.
Deductions under STT
With the transaction bill or its statement that appears a little higher than the transaction amount is due to the imposition of STT on it. The extra amount that an investor would be shelling out would be only for towards the STT. STT cannot be avoided and will stay for all purchases and sales of the securities. At the end of the year, the investor can claim for a certificate of STT from their respective brokers for the STT he has paid for that year. He can then use that amount to be deducted from his short-term capital gains and can get the tax credit due to it. Thus, there is no significant deduction under STT but tax credit can be obtained through it.