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.