Security Transaction tax should be treated like TDS and TCS and credit should be allowed accordingly- a point of view and suggestion for next budget.

[DEV KUMAR KOTHARI]

Security Transaction tax (STT):

Security Transaction tax was introduced for simplification of taxation (collection and recovery) of tax on  income in securities.

As a  consequence or result of levy of STT long-term capital gains were fully  exempted and short-term capital gains were concessionally taxed under the Income –tax Act, 1961.

STT is not allowed as an expenditure while computing capital gains.

In case of business profit arising from transactions in seucrities earlier a tax rebate equal to STT was allowed and now STT is allowed as an expenditure against business income.

Over a period of time, treatment of STT and consequent relief under IT Act have  seen several forms.

Transactions which did not suffer STT were taxed normally as per nature of income in hands of any assessee.

As readers are well aware of these aspects and one can easily search information, a detailed discussion is not made in this article.

STT is in lieu of income-tax:

On conjoint reading of provisions relating to STT and income-tax, It can be said that STT is levied

Inlieu of income-tax. On levy of STT certain relaxationsa re allowed as a result income-tax payable is reduced. Therefore, it can be said that STT is in lieu of income-tax, though it is levied as STT.

STT is payable irrespective of income or loss or no income no loss:

STT is payable irrespective of any income earned or not and even in case of loss.

For examples:

1. When a security is purchased and STT is levied, the STT so paid is not allowed to be added to cost of acquisition or purchase value of security even at the time of purchase and also at time of sale.
2. When a security is sold, STT is levied but such STT is not allowed as expense for transfer of security.
3. Even if there is loss in transactions in securities, STT is levied.

Had it been a transaction tax like  sales tax, purchase tax,  service tax or VAT or GST the same would have been allowed as cost of acquisition and expenses for transfer etc.

At present service tax levied on brokerage and other services  of stock exchange and SEBI are  allowed, but STT is not allowed as cost of securities or expenses for transfer of securities. 

Purpose of levy of STT:

For ascertaining purpsoes of levy of STT we can refer to the following:

FROM 268 ITR 196 (ST.)- MEMORANDUM EXPLAINING PROVISIONS IN THE FINANCE (NO.2) ACT, 2004

Levy of Transaction tax and exemption / concession on capital gain arising from securities entered in a recognized stock exchange

Under the existing provisions of the Income-tax Act, profits or gains arising to an investor from the transfer of securities are charged to tax either as long-term capital gains or short-term capital gains depending on the period of holding of the said securities. Short-term capital gains arising from transfer of securities are taxed at the applicable rates. Long-term capital gains are taxed at 20% after adjusting for inflation by indexing the cost of acquisition. For listed securities, the tax payer has an option to pay tax on long-term gains at 10% but without indexation. For Foreign institutional Investors (FIIs) the long-term capital gains and short term capital gains are taxed at the rate of 10% (without indexation) and 30% respectively. In case of a trader in securities however, the gains are taxed as any other normal business income.

With a view to simplify the tax regime on securities transactions, it is proposed to levy a tax at the rate of 0.15 per cent. on the value of all the transactions of purchase of securities that take place in a recognized stock exchange in India. This tax shall be collected by the stock exchange from the purchaser of such securities and paid to the exchequer. The provisions relating to the proposed tax are contained in Chapter VII of the Finance (No.2) Bill, 2004, and shall take effect from the date this Chapter comes into force. 

Further it is proposed to insert clause (38) in section 10 of the Income-tax Act, so as to provide exemption from long-term capital gains arising out of securities sold on the stock exchange. It is also proposed to insert a new section 111A and amend section 115AD of the Income-tax Act, so as to provide that short-term capital gains arising from sale of such securities to an investor including FII shall be charged at the rate of ten per cent.

These amendments will take effect from 1^st April,2005 and will, accordingly , apply to assessment year 2005-2006 and subsequent years.

                                                      [Chapter VII and Clauses 5, 24, 25]

In view of above brief discussion and the memorandum and explanation for levy of STT it is a clear case that STT is in lieu of income-tax fully when income like long-term capital gains are exepted and partially when concessional rate of income-tax is applied.

Credit like TDS or TCS should be allowed:

In view of above discussion it is a case of collection of income tax in guise of STT for which credit against income- tax payable is not allowed.

Therefore, on proper treatment,  STT should be treated like income-tax paid on behalf of parties to contract in securities. Credit of STT should be allowed as income-tax collected through mechanism of STT. It should be teated like TDS and TCS.

Request and suggestion to  honourable PM and FM:

Through this write-up a request is made to honourable PM and FM to consider ground reality and make specific provisions for treating STT just like TDS and allow credit for STT as advance income  tax paid. This should be allowed against tax payable by assessee and if excess tax is paid, in totality ( including TDS, TCS, STT, advance tax , self assessment tax paid  etc.) refund of excess should be allowed to assessee who entered into security transactions and from whom STT was collected.