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Chapter 16 What is STT and What is Advance Tax?

Section 1: What is Securities Transaction Tax?

Security Transaction Tax (STT) was first introduced in the Union Budget 2004 presented by then Finance Minister P Chidambaram under the UPA government. The idea of STT was that since capital gains taxes were subject to evasion through real and fictitious losses, the actual potential of taxing the stock markets was not being realized. Hence, even as long-term capital gains (LTCG) tax was exempted, this exemption was made contingent on having paid the STT on that particular transaction. The STT currently generates revenues of over Rs.7,500cr ($1.2bn) for the government each year, and is one of the primary reasons it still continues.

Securities Transaction Tax (STT)

STT is currently imposed on equity and derivative transactions as well as on the sale of equity funds. This means that when you redeem equity funds, you are liable to pay STT on the value of the sale. We shall look at specific rates of STT later in this chapter.

STT is not only imposed on equity transactions but also on futures and options transactions on the sell side. Of course, the rates on futures and options are much lower than on equities since such contracts are valued notionally.

The table below captures the rates of STT applicable and who has to pay it.

Taxable securities transaction Rate of STT Payable by Value Considered
Delivery-based purchase of equity share 0.1% Purchaser Price at which equity share is purchased*
Delivery-based sale of an equity share 0.1% Seller Price at which equity share is sold*
Delivery-based sale of a unit of equity-oriented mutual fund 0.001% Seller Price at which unit is sold*
Sale of equity share or unit of equity-oriented mutual fund in recognized stock exchange otherwise than by actual delivery or transfer and intraday traded shares 0.025% Seller Price at which equity share or unit is sold*
Derivative – Sale of an option in securities 0.017% Seller Option premium
Derivative – Sale of an option in securities where the option is exercised 0.125% Purchaser Settlement price
Derivative – Sale of futures in securities 0.01% Seller Price at which such futures is traded
Sale of unit of an equity-oriented fund to the mutual fund – Exchange-traded funds (ETFs) 0.001% Seller Price at which unit is sold
Sale of unlisted shares under an offer for sale to the public and included in IPO and where such shares are subsequently listed in stock exchanges 0.2% Seller Price at which such shares are sold

From the capital markets standpoint, there are some interesting takeaways from this table. Futures, options, mutual funds, and intraday trades attract STT only on the sell side and not on the buy side. Only in the case of delivery equities is STT involved on the buy side also. The buy side STT applies in the case of exercising of options because that is deemed to be the delivery of equity shares. Another important factor is that in case of options, the STT is calculated on premium value rather than on notional value. In fact, this shift in STT calculation was instrumental in giving a spurt to the volumes of options traded in India.

5 key things to know about STT

Before we get into a discussion about STT, there are 5 fundamental points you need to be fully aware of.

  • STT is an indirect tax and is imposed on the broker rather than on the investor/trader directly. The broker, in turn, collects the STT from the investor/trader and deposits it with the government.
  • Unlike capital gains, the focus of STT is not on whether the client makes profits or not. STT has to be paid on transactions, and hence, it is applicable irrespective of whether you make a profit or make a loss.
  • STT used to be a necessary condition for claiming long-term capital gains (LTCG) exemption. However, even after 10% tax on LTCG was implemented from Union Budget 2018, the condition continues to remain.
  • STT is not allowed as a deduction while calculating your capital gains. For example, when you calculate your capital gains on a transaction, you get the credit for brokerage and other statutory charges but not for STT.
  • STT adds to your transaction cost, and hence, it changes the economics of a trade in equities and derivatives. It also widens the spread at which traders are required to trade to break even on their positions

Why was STT introduced in India?

It was quite common for taxpayers to resort to evasion to reduce their tax payments to the government. Creating fictitious losses and concealing capital gains were all part of the activities that investors undertook. It is necessary for the government to keep a tab on such measures by having provisions in law or introduce new provisions or modify existing ones in order to curb this practice. As such, the government needed a mechanism to make traders contribute to the exchequer through a compulsory payment mechanism. Since people started evading tax on capital gains by not declaring their profits from the sale of stock, the Finance Act, way back in 2004, introduced a tax called the Securities Transaction Tax (STT) as an efficient means of collecting taxes from financial market transactions.

Concept and levy of STT in India

STT is a kind of financial transaction tax which is similar to tax collected at source (TCS). STT is a direct tax levied on every purchase and every sale of a security that is listed on the recognized stock exchanges in India. STT is governed by the Securities Transaction Tax Act (STT Act), which specifically lists down various taxable securities transaction i.e., transaction on which STT is eligible. Taxable securities include equity, derivatives, unit of equity-oriented mutual fund. It also includes unlisted shares sold under an offer for sale to public through an IPO and where such shares are subsequently listed in stock exchanges. STT is to be paid over and above the transaction value, and hence, this increases the transaction cost. STT is levied on brokers who then collect the same from their clients.

As already mentioned, STT is eligible on transactions involving taxable securities. The STT Act has also provided the value of transactions on which STT is required to be paid and the person who is responsible to pay it, i.e., either buyer or seller. The entire list of rates applicable and the value that will be considered for STT purposes have been laid out clearly in the table of rates. These rates are decided by the Government and modified from time to time if necessary.

The provisions pertaining to the collection of STT work in a similar manner to TCS and TDS (tax deducted at source). STT is required to be collected by the recognized stock exchange, or by the prescribed person in the case of every mutual fund, or the lead merchant banker in the case of an initial public offer, as the case may be, and subsequently payable to the government on or before the 7th of the following month.

In all secondary market transactions, the onus to collect STT from the broker member is on the exchange and the broker member, in turn, will collect this from the customers. If in case the above fail to collect the said tax, they are still obliged to deposit an equivalent amount of tax to the credit of the central government within or by the 7th of the following month. Failure to collect or remit the amount on time will attract interest and will also have penal consequences.

What exactly does fall under the STT ambit?

The term “securities” is not defined separately under the STT Act. The STT Act permits borrowing the definition of such terms not defined in STT Act but defined in Securities Contracts (Regulation) Act, 1956, or the Income Tax Act, 1961. The term “securities” is defined in the Securities Contracts (Regulation) Act and includes the following:

  • Shares, scrips, stocks, bonds, debentures, debenture stock, or other marketable securities of a like nature in or of any incorporated company or other corporate
  • Derivatives: Futures and options
  • Units or any other instruments issued by any collective investment scheme to the investors in such schemes
  • Government securities of equity nature
  • Equity-oriented units of mutual fund
  • Rights or interest in securities
  • Securitized debt instruments

Hence, securities include all of those mentioned above if they are traded on a recognized stock exchange. Off-market transactions done through demat-to-demat transfers are outside the purview of STT.

Explicit costs of trading in equities: How STT matters?

It is important to understand how the STT is calculated as part of your trading costs. The most basic cost of trading is brokerage, which is paid to the broker for his services. But if you open your contract note, you will find a plethora of charges that are debited to your trading account apart from brokerage. There is the securities transaction tax (STT) and the goods & services tax (GST) that the broker collects from you on behalf of the government. Then there is a state-level stamp duty which differs from state to state. Then there is an exchange transaction fee payable to the stock exchange apart from the Sebi turnover fee that is payable to the regulator.

Let us understand the rates and how these costs stack up.

Illustration 1:

600 shares of RIL purchased at Rs.970/share (trade value = Rs.5,82,000)
Cost Item Rate of Impost Actual Cost
Brokerage Cost 0.2% of trade value (assumed) Rs.1,164.00
STT 0.1% of trade value (delivery) Rs.582.00
NSE transaction charges 0.00325% of trade value (NSE) Rs.18.92
GST 18% of (brokerage + transaction cost) Rs.212.92
SEBI turnover fee Rs.15/crore of volume Rs.0.87
Stamp duty 0.01% for Maharashtra Rs.58.20
Total Cost -- Rs.2,036.91
Effective Cost of Trading -- 0.35%

As can be seen from the above illustration, there are 5 other costs involved in your equity trading contract note apart from the brokerage costs. When you add these up, your actual effective cost goes up by 3/4th. Hence, it is essential to get a holistic view of the costs of trading! When the shares are sold, these will be levied on the sell side also. This illustration helps you to get a better perspective of how STT fits into your broking transactions.

STT and capital gains tax and their relation

When the STT was introduced in 2004, a new Section 10(38) was simultaneously introduced to benefit taxpayers who would incur the said tax. As per income tax laws, for transactions undertaken until March 31, 2018, any capital gain on sale of shares or equity-oriented mutual fund units that are subject to STT is taxed at a beneficial/Nil rate. While long-term capital gains (if shares or equity-oriented mutual funds are held for >12 months) are exempt from tax, short-term capital gains on such securities is taxed at a concessional rate of 15%.

However, in order to prevent the abuse of exemption provisions, Finance Budget 2018 proposed to withdraw the exemption on long-term capital gains and tax the same on equity shares and EOMF at a concessional rate of 10% with respect to transfer effected on or after April 1, 2018. However, gains accrued till January 31, 2018, are grandfathered i.e., in the case of transfers up to January 31, 2018, the cost of acquisition of shares or equity-oriented mutual fund acquired before February 1, 2018, will be replaced by fair market value as on January 31, 2018. But even to claim the concessional gains under LTCG and STCG, the payment of STT is a necessary precondition.

Tax on business income

In the case of persons who trade in securities and show profit/loss from such trading as a business income/expense, the STT paid is allowed to be deducted as business expense. This is the difference to be noted. STT is not allowed as a deduction in case you are showing it as capital gains or even as capital losses.

Section 2: What is Advance Tax?

The Income Tax (I-T) Department requires all assessees to pay their taxes in four installments during the course of a year for the income pertaining to that particular financial year. Advance tax means that income tax should be paid in advance instead of a lump sum payment at year-end. It is also called the “pay-as-you-earn” tax. These payments have to be made in installments on the dates provided by the I-T Department.

Who is required to pay advance taxes?

Primarily, every assessee is required to pay income tax in advance. The list below will shed some more light on this.

  • In the case of employees, freelancers, and businessmen, if your total tax liability is Rs10,000 or more in a financial year, you have to pay advance tax. Senior citizens above 60 who do not run a business are exempt from paying advance tax.
  • Taxpayers who opt for presumptive schemes where business income is assumed at 8% of turnover less than ₹2cr are exempt from advance tax for FY2017-18. This is scheme is only applicable from the financial year 2017-18, not prior to that.

Know the due dates for payment of advance tax for various categories

Individual taxpayers and corporate taxpayers (FY2017-18 & FY2016-17)

Due date Advance tax payable
On or before June 15th 15% of advance tax
On or before September 15th 45% of advance tax
On or before December 15th 75% of advance tax
On or before March 15th 100% of advance tax

For taxpayers who have opted for the presumptive taxation scheme (business income)

Due date Advance tax payable
On or before March 31st 100% of advance tax

For taxpayers opting for presumptive taxation who have their business income from plying, hiring, or leasing of goods carriages, Section 44AE of the Income Tax Act is involved.

Due date Advance tax payable
On or before June 15th 15% of advance tax
On or before September 15th 45% of advance tax
On or before December 15th 75% of advance tax
On or before March 15th 100% of advance tax

Key takeaways on advance tax payments

  • Advance tax payment is made using Challan 280 just like any other regular tax payment. You can pay advance tax through any nationalized or scheduled bank that has been authorized for the same.
  • Advance tax is payable if your tax liability for any financial year after reducing TDS is more than Rs.10,000.
  • For NRIs, a slightly different rule will apply for advance tax payments. An NRI who has an income accruing in India in excess of Rs.10,000 is liable to pay advance tax.
  • Resident senior citizens not having business or professional income are not liable for advance tax.
  • Non-payment of advance tax will result in the levy of interest under 234B and 234C of the Income Tax Act, 1961.
  • You can consider deductions under Section 80C, 80D, and Section 24, etc., but not Section 80G, while estimating your income for the year to compute your advance tax liability.
  • If you miss the deadline for advance tax payment on May 31, you can still go ahead with the payment on or before March 31 of that financial year. Such payment will still be treated as advance tax only.
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