Budget 2022: Centre boosts STT target as mop-up beats expectation

Securities transaction tax (STT), which is levied on purchase and sale of equity shares and their derivative contracts, has emerged as a healthy source of income for the government. The Centre is now budgeting an STT collection of Rs 20,000 crore this fiscal year as well as the next. The spurt in market capitalisation and trading volumes has helped the STT collection exceed the Budget Estimates of Rs 12,500 crore for the ongoing fiscal year and given the government the confidence to set a target that is 65 per cent higher than the previous six-year average.

STT rates range between 0.01 per cent and 0. 1 per cent, depending on the nature of the transaction. The STT collection for FY22, so far, has reached Rs 17,000 crore, underpinned by the doubling of volumes in the derivatives segment and the jump in market capitalisation. But growth in cash segment volumes — where STT is levied at the highest rate — has been muted.

India’s market cap is now 30 per cent higher than what it was at the end of FY21. Besides appreciation in stock prices, the market cap has been lifted by record initial public offerings (IPOs). In FY22, so far, IPOs have mobilised Rs 1.1 trillion — 3.5 times more than the FY21 figure.

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A collection of Rs 20,000 crore this fiscal year is almost a certainty, according to market players, who feel the FY23 target is also achievable despite headwinds, such as monetary tightening, especially by the US Federal Reserve.

“Even in the coming year, India’s market capitalisation will continue to rise as more and more companies, especially unicorns go public. While returns expectations for stocks during this year will definitely get tempered on account of Fed tightening, at an aggregate level, indices are likely to gain from here. There was a fear last week that the finance minister may tweak the capital gains tax laws but fortunately, that has not come through. Had that happened, it might have had some impact on investor participation in the markets and hence, STT collections. The LIC IPO will likely see a huge surge in the number of first-time equity investors and that is also going to provide a boost to trading volumes in the market over time, as some of them may stay active in the markets, in general. All in all, STT collections next year are likely to be high,” said Ricky Kirpalani, lead sponsor, First Water Capital Fund (AIF).

The sustained revenue receipts from the STT route, however, dashed hopes of the abolishment of STT that many market players harbour.

STT was introduced in 2004 as long-term capital gains (LTCG) was abolished. However, LTCG was reintroduced in Budget 2018, alongside STT.

“The levies on the domestic capital markets are high compared to global standards. This is a deterrence for many overseas investors. As long as the market is buoyant and returns are good, investors won’t complain. But if the markets turn bearish, STT will begin to pinch,” said a broker.