Securities transaction tax collection increases 42% despite Covid-19 crisis

Tax payouts from mutual fund unit holders shoot up by 84%

While the pandemic impacted most of the tax receipts this year, the government’s securities transaction tax (STT) zoomed up by 42 per cent in the period between April and December of FY21.

According to sources in the Central Board of Direct Taxes (CBDT), so far, STT collection stands at Rs 10,805 crore for FY21, as compared to Rs 7,574 crore over the same period last year. The commodity transaction tax (CTT) stands at Rs 625 crore, taking the total tax collection from the stock market to Rs 11,431 crore so far in this financial year.

The government, which has set an STT collection target of Rs 13,000 crore for FY21, hopes to cross that figure by the end of the current fiscal. 

The equity markets also propelled the tax paid on profits by mutual fund unit holders, particularly companies, to go up by 84 per cent during the same period. 

This is because of the change in the tax structure from April 2019, which made such income taxable in the hands of unit holders. Official figures show that companies holding units of MFs paid taxes to the tune of Rs 1,156 crore, as against Rs 625 crore the previous year.

However, individuals holding MF units paid a mere Rs 46 crore as tax, as compared to Rs 3,064 crore (a fall of 98 per cent) over the same period last year. This was due to the huge redemptions by retail investors during the lockdown in the wake of the pandemic.  

In March this year, as the coronavirus spread, equity markets crashed on global cues and the Indian economy saw the worst growth contraction in its history. Since then, however, the markets have been breaching new highs, with marginal corrections. But with every correction, mutual fund investors have booked profits.

Even though the mutual fund industry saw heavy outflows, particularly in the month of July, the reason for the higher STT collection lies in heightened volumes in the futures and options segment during April to December 2020, even as volumes fell on several occasions. So far in this fiscal year (April to Dec 29, 2020), the overall market turnover across both cash and derivatives segments (BSE plus NSE) was up by 16.4 per cent as compared to FY 2019-20.

Typically, collections decline during weak market conditions or a fall in stock prices. For instance, STT collections dropped below Rs 500 crore in FY13 amid a downturn in the market. 

Since then, collections have been on the rise, thanks to an upward trend in the market. 

In FY19, the government collected Rs 11,528 crore from STT, of which Mumbai alone contributed Rs 11,235 crore.

The market performed relatively well between April 2019 and January 2020, but in February, the sharp sell-off sparked by the coronavirus outbreak pushed the Nifty and Sensex into bear territory, eroding billions of rupees of investor wealth. 

The total derivatives trading volume fell 22 per cent in February, while in the cash segment, total volumes were down 2 per cent. Introduced in 2004, the STT is levied on all stock market transactions. The tax is in the range of 0.017 per cent and 0.125 per cent of the transaction amount. 

The STT rate for delivery-based trades is 0.1 per cent, while that on intra-day trades is 0.025 per cent. Similarly, the tax levy on derivatives trade is between 0.01 per cent and 0.05 per cent, unless an option contract is exercised.

Though STT collections have gone up sharply, the total direct tax collection, of which it is a small part, has slipped by 13 per cent and stood at Rs 5.87 trillion as on December 16.