What are STT (Securities Transaction Tax) and CTT?
Here are some things to know about STT and CTT:
Securities Transaction Tax:
- The STT came into effect after the passage of 2004 Financial Act.It is imposed on the purchase and sale of shares and their derivatives traded on stock exchanges. This tax is not levied on off-market transactions, commodity/currency transactions or gold exchange-traded funds (ETFs). The STT rates – usually a percentage of the total worth of the transaction – have been revised subsequently over the years.It currently stands at 0.1% on the trade value. In case of derivatives trading, the tax ranges from 0.01% to 0.17% and is levied only on the seller.
- In 2008,the government allowed professional traders and brokers to treat STT as an expense which could be deducted from the income instead of treating it as an advance tax paid.This helps lower the total taxable income.
- In India, the stock exchanges collect STT for thegovernment.It has been adding about Rs 6,000 crore as tax revenue to the government each financial year.
- Stock market participants cheer whenever the STT is reduced. It is considered that removal of such taxes can stimulate the markets further by lowering transactions cost and increasing liquidity in stock markets.
Commodities Transaction Tax (CTT):
- CTT is the tax levied on exchange-traded commodity derivatives.It is also considered as a financial transaction tax similar to the STT.
- The government, in 2008-09, proposed to impose CTT at 0.017% (equivalent to the rate of equity futures at that point of time), but later withdrew the proposal. Devoid of any transaction tax, the commodity exchanges in India grew exponentially.
- However, in 2013-14, CTT was introduced for non-agricultural commodity futures at the rate of 0.01% (equivalent to the rate of equity futures). This rate is used even today. So, every time you trade in the commodities futures market, a tax of 0.01% of the transaction value is levied on the seller in all non-agricultural commodities segments.
- Recently, after extensive demands by the participants in the commodity exchanges and stock markets, the Securities Exchange Board of India (SEBI) and Forwards Markets Commission (FMC) have requested the government to remove STT on at least one leg of transactions and CTT on delivery based transactions. The claim stems out of the philosophy that transaction taxes hurt market participation, increases costs and lowers liquidity.
How are STT and CTT Calculated?
Equity transactions: Let us understand using an example. Suppose you are buying a 500 shares of a company at a price of Rs 100 each, then the total transaction value is Rs 100 x 500 = Rs 50,000. STT is calculated as a percentage of this value. So you have to pay a tax of 0.1% x Rs 50,000 = Rs 50.
Derivatives transactions: In the futures and options market, STT is calculated in a similar way. The Futures STT rate is 0.01%. So if the total value of your futures trade is Rs 1,00,000, then you pay a tax of Rs 10. The tax on Options transactions is 0.17%. So, if your trade value is Rs 1,00,000, then you pay a higher tax of Rs 170. Remember, this tax is only applicable to the seller, not the buyer.
CTT calculation: The CTT is calculated just like STT is for the derivatives transactions. The current CTT rate is 0.01% for all sell-side transactions.
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