STT biased towards speculative derivative trade: BSE

To check tax evasion and attract more retail investors to stock markets, top exchange BSE has proposed that the Securities Transaction Tax (STT) should be substituted by Long Term Capital Gains Tax (LTCG) on equities. This would also help the government get more tax revenues as the overall STT collection (about Rs 21,000 crore in last four years) is far below the quantum of suspected tax evasion. "If STT is substituted by LTCG on equities, government would get more revenue, misuse of the tax incentive curbed and retail investors would come back to market," BSE has said in a a presentation to the Finance Ministry.

In last four years, BSE and NSE had collected STT to the tune of Rs 21,090 crore, while the suspected tax evasion by misuse of incentives available in stock market is estimated at about Rs 20,000 crore in just a one-year period. The capital gains needs to paid on profits made by an investor. But, the LTCG in stock market is nil if the investment is held for more than a year.

The STT on the other hand is payable on all sale and purchase transactions of the securities. In the STT structure, apart from paying the tax twice, an investor has to shell out money irrespective of profit or loss on the trade. However, this structure is often misused by those looking to evade taxes as they sell the shares through stock market by paying the small amount of STT and get the full benefit of exemption from the LTCG tax.

The STT was introduced in Finance Act, 2004. At that time, this marginal tax regime was brought in to boost capital raising through primary market issuances. The shift to STT was also aimed at providing an attractive investment proposition from tax perspective to increase investment in the secondary markets as compared to other non-equity investments.