Brokers clash with NSE over STT on physical settlement in F&O

Brokers on India’s equity derivates markets are locked in combat with the National Stock Exchange (NSE) over levy of securities transaction tax (STT) following the introduction of physical settlement of trades.

Brokers say there is no provision in law to tax derivative trades that result in delivery. However, the exchange has issued a circular saying it will levy 0.1 per cent STT from July 26 on transactions involving physical delivery in derivatives. The matter is likely to go to court, brokers involved in negotiations told BusinessLine .

ANMI, a brokers’ body, dashed off a letter to the NSE on July 17 asking it to halt commencement of physical settlement in the derivative segment until the issue of STT levy was resolved. ANMI reasons that unless Parliament passes a law for STT levy on contracts in equity futures and options (F&O) segment that result in delivery, there is no mandate for brokerages to collecting it by from their clients or for exchanges to collect it from brokers.

“As there is no legal provision for levy of STT on F&O segment delivery transactions, any attempt to collect the same by the Exchange upfront shall also become an illegal act,” ANMI said in its letter.

Brokers say the Centre’s policy on STT clearly stipulates rates for cash and F&O segment. On cash market trades, it is the highest at 0.1 per cent, while it ranges from 0.01 per cent to 0.125 per cent for F&O trades.

SEBI introduced physical delivery as a new segment this year, and identified 46 stocks that will be compulsorily settled via delivery of shares in this segment. There has been confusion over the rate of STT that should be levied on these transactions as it involves various legs of trade such as buying and selling in futures, and final settlement via delivery, where the entire amount has to be paid.

“The exchange has sought an opinion from an eminent senior tax counsel on the applicability of STT, if any, on the settlement/ exercise of F&O trades by way of physical delivery and based on this effective July 26 (being the first expiry date of the derivatives contracts), it has been decided to levy a STT of 0.1 per cent (i.e the rate applicable for taxable securities transaction settled by actual delivery in the cash market segment,” NSE told BusinessLine in response to an email.

“Without prejudice to the above, in the event if CBDT issued any clarification or amendment in this regard, in addition to or contrary to the above position, the exchange reserves right to recover such additional STT from the members effective from the date as may be notified by the CBDT .”

Sources told BusinessLine that the exchange had made a representation to the CBDT, and had been told that an amendment of the law was required for the department to issue any clarification. But the exchange decided to implement STT to avoid being termed a defaulter in case the tax department raised any claims on it in future; the exchange is responsible for STT collections, the source said.

Brokers fear that if the exchange raised a tax claim in the future, they may not be able to collect it from their clients as nobody comes to pay dues that were not applicable to them when they traded.

“It is feared that upon any such future demand for STT, the stock exchanges will simply debit their members' (brokers) bank account/s with the claim amount of the Govt. and leave them high & dry to fend for themselves,” the ANMI letter said.

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