Finance ministry considers change in STT accounting treatment

The finance ministry is considering a proposal to change accounting treatment of the Securities Transaction Tax (STT) in market participants’ books, if not a direct cut in rates. The rationalisation of the STT regime is a key demand from market participants in the run-up to the Union Budget.

STT is levied on purchase or sale of equity shares and derivatives. Since the beginning of 2008-09, the tax paid has been allowed as a deduction from business income. Market participants have made representations requesting the government to bring back the earlier practice where STT was set off against the actual taxes payable.

 

Under the earlier regime, the STT paid on the transactions of shares or mutual funds, when treated as ‘business transactions’ was considered normal income tax paid, and credit was given accordingly, under Section 88E. This meant the tax liabilities of an investor/trader would go down to the extent of the total STT paid in a year.

But, at present, the investor’s tax outgo is effectively reduced by only a third of the STT paid by him during a year. The proposed change, if implemented, can boost the sentiment of the market, which has been languishing without volumes, say market men.

“If you notice, the move to change the accounting treatment a couple of years ago has really begun to hurt now. Most traders are moving to the commodities market, where there is neither transaction tax nor stamp duty,” said a senior official with a large market infrastructure institution.

According to him, the shift of trading activity hurts even long-term investors, as price discovery gets hampered. “As traders move out, the spread widens and impact cost increases. Then, it becomes a self-fulfiling cycle, where volumes go for a toss,” he added.

According to data provided by exchanges, the value traded in the commodity derivatives segment was about Rs 150 lakh crore, compared to Rs 85 lakh crore in equity and equity index-based derivatives. Non-agri commodities form a larger part of the trade on commodity exchanges, compared to that in agri commodities, which is more than 90 per cent of overall volumes.

The average daily volumes for non-agri commodity futures are close to Rs 48,000 crore, while equity derivatives volumes on stock exchanges, including options stands, are much less at Rs 33,000 crore.

Stock brokers contend this significant shift away from equity derivatives is mainly on account of differential application of transaction tax.

As much as 55 per cent of the cost paid by an investor to transact goes in paying STT and stamp duty. However, there is no CTT or stamp duty on commodities. “The government has to make a choice. Does it want to hurt a market that provides growth capital for the economy in favour of trades in gold and metals, which do not result in any productive activity for the economy,” the official quoted earlier said.