The Union Minister of Finance and Corporate Affairs, Nirmala Sitharaman, in her budget speech declared the proposal ‘to give relief in the levy of Securities Transaction Tax (“STT“) by restricting it only to the difference between settlement and strike price in case of exercise of options’.
The Finance Act 2004, modified by Finance Act 2008 levied STT on transactions executed on stock exchanges. STT is levied at diverse rates for diverse types of securities. It was introduced in 2008 by the UPA Government which simultaneously provided an exemption from tax for LTCG.
For the sale of an option in securities, the seller is taxable at 0.05%, where the sale is of an option in securities, where such option is exercised, the purchaser is taxable at the rate of 0.125%. In case of sale of a futures in securities, the seller is taxable at 0.01%.
Value of taxable securities transaction in former shall be at the option of premium in case of sale of an option in securities whereas it shall be the settlement price in case of sale of an option in securities, where the option is exercised. For the purpose of STT, options trade is valued at premium. On this value, the STT rate as prescribed is applied to determine the STT liability. In the case of final exercise of an option contract, STT is levied on settlement price on the day of exercise if the option contract is in the money.
The proposal restricts the levy of STT to the difference between settlement price and strike price in case of exercise of options. Strike price implies the price at which the option is exercised whereas Settlement price is the final price of the underlying asset against which options are traded, it determines whether options are in-the-money or out-of-money at expiry.
Since the settlement value is significantly higher than premium, traders exercising options contract ensued huge STT liability. This is a big relief for such traders as the STT charge will not be determined on basis of the difference between the strike price and settlement price/ market price only. This is expected to drive preference for options derivatives. The proposed amendment be effective from September 01, 2019.
Impact & Missed opportunity
STT has been long criticized as one of the biggest obstacles to raise the volume on the stock market, it was a long-standing demand and market expectation that the same would be struck down in this Budget. STT has been touted to be a deterrent in price discovery and in light of re-introduction of long term capital gains tax (vide Union Budget 2018-19) in excess of INR 1 Lakh on listed securities, it should have been slashed for all securities. Though this relaxation is a progressive move, it is not projected to have any major impact due to its limited reach. The removal of STT and Commodity transaction tax would have improved the liquidity and depth in the market. In the alternative, the Government should consider the reintroduction of erstwhile Section 88E that provided certain benefits in lieu of the STT paid.
 ‘88E. Rebate in respect of securities transaction tax.—(i) Where the total income of an assessee in a previous year includes any income, chargeable under the head “Profits and gains of business or profession”, arising from taxable securities transactions, he shall be entitled to a deduction, from the amount of income-tax on such income arising from such transactions, computed in the manner provided in sub-section (2), of an amount equal to the securities transaction tax paid by him in respect of the taxable securities transactions entered into in the course of his business during that previous year:
Provided that no deduction under this sub-section shall be allowed unless the assessee furnishes along with the return of income, evidence of payment of securities transaction tax in the prescribed form:
Provided further that the amount of deduction under this sub-section shall not exceed the amount of income-tax on such income computed in the manner provided in sub-section (2).
(2) For the purposes of sub-section (1), the amount of income-tax on the income arising from the taxable securities transactions, referred to in that sub-section, shall be equal to the amount calculated by applying the average rate of income-tax on such income.
Explanation.—For the purposes of this section, the expressions “taxable securities transaction” and “securities transaction tax” shall have the same meanings respectively assigned to them under Chapter VII of the Finance (No. 2) Act, 2004.’