Posted on Saturday, February 11, 2017
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Securities Transaction Tax (STT) is a tax being levied on all transactions done on the stock exchanges at rates prescribed by the Central Government from time to time. STT was introduced in the Finance Act 2004 and change multiple times after that.
The STT Rate differs based on the products segment (i.e. Eq Delivery, Eq Future etc) and transaction type (buy, sell).
The brokerage, service tax and STT are indicated separately in the contract note.
Securities Transaction Tax is collected by exchange from the broker on behalf of the client and paid to the Income Tax Department of Government of India. STT is charged based on the segment and transaction type at the rate describe below (as of Feb 2017).
* Exercised Trade means buy (for call options) or sell (for put options) the underlying security at the striking price. We use European Style options i.e. they can be exercised / assigned only on the expiry date.
Brokerage calculator offered by online stocks broker helps understanding the STT investor pays for the security transaction. As the rate of STT is same, you could check the brokerage calculator on any online broker website. i.e. ProStocks Brokerage Calculator (ProStocks is a Mumbai based discount broker offering trades at Rs 15 per trade.)
India, taxes equity futures and options as well as the underlying shares. Futures are taxed based on their delivery price, while options are taxed both on the premium and on the strike price, if exercised.
USA (in 1966), Germany(1991), Japan (1999), Australia (2001), France (2009), Canada, Mexico eliminated its stock transaction tax. This has boost the market participation and volumes significantly in these markets.
It has been observed consistently that STT along with capital gains tax (CGT) distort trading relative to a tax-free market.
India is among the countries with highest taxes in stock markets. Other then brokerage, investor pays taxes:
CGT is tax by Government of India on capital gains. India has two types of capital gain taxes:
The tax free nature of long term capital gain encourages holding of securities for longer term. This holding pattern increases the price of the security over the time and thus offset the burden of STT on the transaction.
In addition to discouraging gains realization, a CGT encourages immediate realization of losses (provided there is some available loss offset).
India has most complex and higher taxes on security transactions in comparison to other similar size markets. India also has lowest participation in the market from the investors.
In India, a stock market investor pays over 7 taxes/fees in addition to the broker commission, demat account changes and bank related transaction charges.
Simplifying the tax structure and reducing it further is the key to increase the participation, which intern makes the market strong and less volatile.
An independent study by SEBI suggested STT on protective-put and hedged-call positions should be reduced to give boost to the option market. The same study concluded that a reduction of 75% in STT was required to achieve any meaningful arbitrage opportunities.
Decreasing the STT or even getting rid of it all together in some segments could significanly increase the volume of trading.
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