The regulatory tightening of Futures and Options (F&O) trading, among other factors, led to a decline in securities transaction tax (STT) collections. Should current trends persist, revenue is expected to fall short of Budget estimates, a scenario not seen since FY20.
Data made public by the Income Tax Department show that STT collection was around ₹44,500 crore as on January 11. Meeting Budget estimates will require a collection of over ₹33,400 crore in the remaining 79 days, a target that appears increasingly challenging. “Impact on the F&O volumes after the STT rate hike and regulatory tightening also seem to have played a part. Unless, of course, there is a significant uptick in trading volumes or other positive market developments, actual collections are likely to fall short of the Budget estimate,” an tax expert said.
STT was implemented in 2004 to combat tax evasion on capital gains. It is charged on the value of securities (excluding commodities and cash) and mutual funds. It is a direct tax, levied directly on the transaction value of securities. This means the STT is an additional cost that buyers and sellers must bear, making the transaction more expensive. It is governed by the Securities Transaction Tax Act, which lists the various types of securities transactions that are taxable. These include equity, derivatives and units of equity-oriented mutual funds. STT also applies to unlisted shares sold under an offer for sale to the public that is subsequently listed on stock exchanges.
According to another tax expert, the trading volumes across stock brokers are said to be significantly lower than expected. This shows a cautious investor sentiment, given the dynamics of the market and significantly volatile international economic scenario. “SEBI’s tightening of the regulations on derivatives also appears to have an impact on trades in the derivative segment. While the officials are hopeful of meeting the direct tax collection target at the back of strong advance tax collection figures, the deficit in STT collection against BE requires careful evaluation and reflection so that any corrective measures may be considered in the upcoming Budget,” he said.
Elevated volatility
Another tax expert, feels the Indian stock market has seen elevated volatility this fiscal year as macroeconomic headwinds and shifting global risk dynamics influence investor sentiments. These factors, along with intermittent FPI outflows, have kept equity markets range-bound and sensitive to global cues. Escalating geopolitical tensions have also shifted investor preference towards the metals segment, particularly precious metals such as gold and silver, which are increasingly seen as safe-haven assets.
As the risk appetite for equities has moderated, investors have been reallocating funds from broader equity markets to metals and other asset classes. Tightening of risk management in F&O segment by the regulators has restricted speculative trading activity, a key contributor to the STT kitty. “All these factors collectively, combined with an overly ambitious budgetary target — largely extrapolated from the unusually strong STT collections in the previous fiscal year — appear to have contributed to the wider gap between estimated and actual STT collections in the current year,” he said.
