Demystifying Securities Transaction Tax

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: The Union Budget 2004-2005 proposes a paradigm shift in the taxation of capital gains on financial securities by introducing the Securities Transaction Tax (STT). Let us study the implications of this new tax.

Taxation of Capital Gains on Financial Securities
For years together, the profit on sale of securities like shares, debentures, bonds, units of Mutual Funds, et al, was calculated in different ways and was also subject to income-tax at different rates depending upon the period of holding.

The Paradigm Shift
However, the Finance (No 2) Bill, 2004 introduced by the honourable Finance Minister, Mr P Chidambaram, while presenting his much awaited Union Budget 2004-2005, has ushered a paradigm shift in the taxation of profits on financial securities with effect from assessment year 2005-2006 (financial year from April 1, 2004 to March 31, 2005).

Securities Transaction Tax
The Budget proposes to introduce a “securities transaction tax” (STT). In the words of Mr P Chidambaram, STT is a neat, efficient and easy-to-administer tax and it has the great advantage of virtually eliminating tax avoidance.

The STT is applicable at different rates on the value of the “taxable securities transaction,” which again is defined to mean a transaction of purchase and sale of securities entered into in a recognised stock exchange in India on or after the date on which Chapter VII of the Finance (No 2) Bill, 2004 comes into force (i.e. the specified date) and is payable by the buyer and the seller of the securities. For this purpose, “securities” are defined under section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA) to include:

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ii) derivative;

(iii) units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(iv) security receipt as defined in section 2(zg) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(v) Government securities;

(vi) such other instruments as declared by the Central Government; and

(vii) rights or interest in securities.