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Securities Transaction Tax (STT) Challenge

Why in News

  • The Supreme Court of India has issued notices on a plea challenging the constitutional validity of the Securities Transaction Tax (STT).
  • The petitioner claims STT violates fundamental rights, particularly:
    • Article 14: Right to equality
    • Article 19(1)(g): Right to trade or profession
    • Article 21: Right to live with dignity
  • The case has drawn attention because it could impact stock market regulation, direct taxation, and financial market participants.

Relevance

  • GS-2 (Polity & Governance):
    • Constitutional rights: Article 14, 19(1)(g), 21
    • Role of judiciary in reviewing legislative competence
  • GS-3 (Economy & Finance):
    • Taxation policy and financial market regulation
    • Double taxation, equity and efficiency in taxation

Basics of STT

  • Introduction: STT was introduced in 2004 under the Finance Act.
  • Purpose:
    • To curb tax evasion in securities markets.
    • Applied on transactions on listed stock exchanges.
  • Nature of Tax:
    • Levied on all securities transactions, including buying and selling shares, derivatives, and equity mutual funds.
    • Charged irrespective of profit or loss, unlike income tax which is applied on net profit.

Key Claims in the Petition

  • Double Taxation:
    • STT is levied even when capital gains tax is paid on the profit from the same transaction.
    • Example: If a trader earns ₹1 lakh profit:
      • Capital Gains Tax (CGT) applies
      • STT is additionally charged, increasing the effective tax burden.
  • Punitive Nature:
    • Tax is applied even on loss-making trades, unlike most Indian taxes which are profit-linked.
    • Viewed as deterrent to free trade.
  • Violation of Fundamental Rights:
    • The petitioner argues STT infringes the right to earn a livelihood and equal treatment under law.
    • No refund or adjustment mechanism like TDS in salaried income exists for STT.

Legal Context

  • Current Framework:
    • STT is mandated under Finance Act, 2004, applied to:
      • Equity shares
      • Derivatives
      • Equity-oriented mutual funds
    • Collected at the time of transaction, automatically deducted by brokers.
  • Comparative Mechanism:
    • TDS (Tax Deducted at Source) for salaried individuals can be adjusted/refunded annually.
    • STT has no such provision, making it unique and potentially punitive.

Broader Implications

  • Financial Market Impact:
    • If SC strikes down or modifies STT, it could reduce compliance burden for traders.
    • Potentially increase trading volume and liquidity in stock markets.
  • Government Revenue:
    • STT revenue in FY 2023-24: ~₹9,500 crore (approximate, from Union Budget data).
    • Challenging STT could affect direct tax revenue from securities transactions.
  • Policy Debate:
    • Balances tax collection efficiency vs fundamental rights.
    • Raises questions on design of financial market taxation in India.

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