Securities Transaction Tax (STT)

The Supreme Court has agreed to examine a petition challenging the constitutional validity of the Securities Transaction Tax (STT) imposed under the Finance Act, 2004.

What is Securities Transaction Tax (STT) ? 

• Nature of the Tax: The Securities Transaction Tax (STT) is a direct tax levied on the value of taxable securities transactions carried out through recognized stock exchanges in India.
• Legal Basis: Securities Transaction Tax Act (STT Act), introduced under the Finance Act, 2004.
  • STT is administered by the Central Board of Direct Taxes (CBDT) under the Ministry of Finance
• Applicable: STT applies to every purchase and sale of securities such as shares, derivatives, and equity-oriented mutual funds.
• Objective: To curb tax evasion in capital market transactions and simplify tax collection on securities trading.

Grounds of Constitutional Challenge

• Violation of Fundamental Rights: The STT violates Article 14 (Right to Equality) and Article 19(1)(g) (Freedom to Practice Any Profession or Trade), as well as the Right to Livelihood implicit under Article 21.
• Tax on the Act of Profession: The petition emphasized that STT is the only tax in India imposed merely for engaging in a profession, irrespective of profit or loss. This makes the tax punitive and deterrent in nature, discouraging legitimate market participation.
• Double Taxation Concern: The levy of STT amounts to double taxation since a trader already pays capital gains tax on profits earned from the same transaction. The imposition of STT in addition to capital gains tax was claimed to be constitutionally impermissible.
• Lack of Refund Mechanism: Unlike Tax Deducted at Source (TDS), which can be adjusted or refunded against annual income tax liability, STT cannot be refunded or adjusted, even when a trader operates at a loss. This lack of parity makes STT arbitrary and unfair.

Rationale Behind STT

• STT was introduced in 2004 as part of fiscal reforms to prevent tax evasion in securities markets, where underreporting of capital gains was common.
• It was designed to function similarly to TDS, ensuring automatic collection of a small tax on every transaction at the source, thereby improving compliance and transparency.

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