SLATE. All you wanted to know about STT

The finance minister gave some relief to the stock market by not stretching the holding period for equities to earn the long-term capital gains benefit to three years.

But the sting in the tail came in the form of a sizeable securities transaction tax (STT) hike on options trades to 0.05 per cent from 0.017 per cent. The STT has attracted controversy since its introduction. While the exchanges were lobbying for the removal of this tax, the Centre had done the unexpected by raising the STT rate.

STT is a tax on transaction in equities (as well as equity derivatives). It was introduced in 2004-05 Budget by finance minister P Chidambaram to bring all stock traders into the tax net.

In the same year, to neutralise some of the negative impact, long-term capital gains tax on equities was removed and short-term capital gains tax reduced to 10 per cent. Currently, a delivery trade in cash market attracts STT of 0.1 per cent on traded turnover levied both at the time of purchase and sale of shares.

If it is an intra-day trade, STT is 0.025 per cent on the sell side. For futures, it is 0.01 per cent, and for options an even lower 0.017 per cent used to be levied. Now, this has been hiked to 0.05 per cent.

There is no escaping the taxman. Before the introduction of STT, many traders would not disclose profits made in the equity market and sidestepped tax on capital gains. But this has changed in the last 10 years with the introduction of STT. The tax is collected by the broker along with other transaction charges such as stamp duty and exchange house levy, and passed on to the Centre.

This has become a good revenue generator for the tax department as trading volumes in the market have grown by leaps and bounds in the past decade. In 2015-16, for instance, the Centre collected ₹7,398 crore on STT. But since introduction, this tax has won the ire of investors and stock exchanges.

In every Budget, exchanges lobby for its abolition. The Centre, though it has reduced the rate over years (it was at 0.15 per cent on intra-day trades when it was introduced) has not heeded to the demand for its complete removal.

With their wish turned down every time, stock exchanges then started asking for a transaction tax on commodities to plug migration of volumes from the equity to the commodity exchange. In 2013, finally, the Centre did come up with CTT— commodity transaction tax (0.01 per cent) on non-agri commodities.

STT of 0.025 per cent on intra-day trades is not much you may think. But for a day trader, it is some increase in cost. STT can form 40-50 per cent of the total transaction cost on equities. Other transaction charges include brokerage (of 0.01-0.03 per cent on intraday), stamp duty (0.002 per cent in Mumbai), exchange levy (NSE’s is 0.00325 per cent) and service tax. Given that day trades survive on wafer-thin margins, a few extra bucks spent on taxes is a pain.

With the STT on options hiked by almost three times now, traders may feel the pinch. Trading volumes in index options make for over 90 per cent of the derivative volume in NSE.

The centre isn’t keen on short- term investors in equity markets. If you are game, make sure you make profit even after the STT

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