Securities transaction tax regime to come into effect from Oct 1

Will the Market correct itself once the Securities Transaction Tax gets introduced?

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Securities transaction tax regime to come into effect from Oct 1

THE Securities Transaction Tax (STT) regime for the capital market would come into effect from October 1, 2004. A notification to operationalise the new tax structure from this date is to be issued by the Ministry of Finance within the next couple of days.

The Finance Minister, Mr P. Chidambaram, has given his assent for the issuance of the notification, a senior Finance Ministry official said.

The Central Board of Direct Taxes (CBDT) has completed its part of the paperwork, leaving the final steps for notifying the date to the Union Government.

In the interim, the Government has asked the Securities and Exchange Board of India (SEBI) to alert market participants including brokers on the date from which the new tax regime would come into play so as to keep them ready. "We have asked SEBI to alert the brokers on the date for the changeover," a senior Finance Ministry official said.

Officials said that the CBDT would issue rules for STT soon after the notification on the new taxation regime is issued.

The rules would specify the method of determining the price of taxable securities both in the cash and the derivatives segment of the market.

The STT regime was initially announced by Mr Chidambaram, in his Budget speech on July 8, 2004.

After factoring in the views of some of the market participants, the Finance Minister had on July 21 announced changes to the same. He held that the 0.15 per cent STT would be confined to only delivery-based trade in equities.

Sale and purchase of bonds were totally exempt from the levy.

On delivery-based trade in equity, the Finance Minister made two significant modifications.

Firstly, the 0.15 per cent rate would be split equally between the buyer and the seller.

This is in contrast to Mr Chidambaram's original proposal, where the buyer was required to fork out the entire levy.

Secondly, intermediates who declare business profits on delivery-based transactions can also claim credit for STT against the tax paid by them on business profits.

Further, the STT rate for day-traders and arbitrageurs had been slashed to 0.015 per cent.

They have also been allowed to set-off their entire STT liability against the tax paid by them on business profits.
Transaction Tax On Average Trade Price

The securities transaction tax (STT) on buying and selling stocks will be levied on the average price of the stock instead of the traded price. The tax is expected to be operational in the first week of October. An official announcement in this regard is expected soon.

A decision to this effect was taken at a high-level meeting of finance ministry (MoF) officials in New Delhi last week. There are still certain issues to be sorted out, as to who will collect the tax and how the set-off will be allowed on that. A consensus could not be reached on the issue at the meeting, as there is more than one ministry involved, said a source familiar with the development.

According to the source, the rules are still to be framed and we are in constant touch with the exchanges, informing them about how the tax is to be levied. We are trying our best to implement it by October 1.

STT was to be implemented immediately, following the ratification of budget by both the Houses of Parliament. It would have come into effect with the issuance of a notification. However, stock exchanges sought time to implement it as the onus of collecting and depositing the tax from members rests with them. A provision to this effect was made in Finance Bill, 2004 itself.

Both the premier stock exchanges the National Stock Exchange (NSE) and The Stock Exchange, Mumbai (BSE) had asked the Securities and Exchange Board of India (Sebi) for at least four weeks time to make necessary changes in their software to accomodate the provisions of the new tax.

They voiced their inability to implement STT on the trade price of stocks owing to software hitches. Since 80% of trades account for day trading, levying the tax on average price would not make much of a difference.

The Finance Bill had proposed to abolish tax on long-term capital gains on securities transactions. In its place, it had proposed to levy a small tax of 15 basis points split between the buyer and the seller on delivery based securities transactions through SEs. The transaction tax on day traders would be 1.5 basis points and for the futures and options transactions, it would be levied at 1 basis point.

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