The securities transaction tax (STT) was introduced in India a few years ago, to stop tax avoidance of capital gains tax. Earlier, many people usually didn’t declare their profits on the sale of stocks and avoided paying capital gains tax. The government could tax only those profits, which have been declared by people.
To stop this situation, the then Finance Minister P Chidambaram—in the Union Budget 2004-05—introduced STT. Transactions in stock, index options and futures would also be subject to transaction tax. This tax is payable whether you buy or sell a share and gets added to the price of the stock at the time the transaction is made. Since brokers have to automatically add this tax to the transaction price, there is no way to avoid it.
The Finance Ministry has supported the introduction of the STT to simplify the tax regime on financial market transactions. According to the ministry, STT is a clean and efficient way of collecting taxes from financial markets. In the words, STT is a neat, efficient and easy-to-administer tax and it has the great advantage of virtually eliminating tax avoidance.
STT is levied on every purchase or sale of securities that are listed on the Indian stock exchanges. This would include shares, derivatives or equity-oriented mutual funds units. The rate of tax that is deducted is determined by the central government, and it varies with different types of transactions and securities. STT is deducted at source by the broker or AMC, at the time of the transaction itself, the net result is that it pushes up the cost of the transaction done.
Scope of STT
So the next time, your broker or asset management company sends you your transaction bill or statement, remember that the extra bit you are paying over and above your transaction is nothing but the tax that has been levied. Whether it is purchase and sale of shares or mutual fund units, STT will stay and cannot be avoided. At the end of the year, you can ask your broker to give you a certificate of the STT that you have paid through the year. You can use this amount to deduct from your short term capital gains and get a tax credit.