Why in the News?

The Supreme Court of India has agreed to examine a petition challenging the constitutional validity of the Securities Transaction Tax (STT) imposed under the Finance Act, 2004.

What is the Securities Transaction Tax (STT)?

• About: A direct tax levied on purchase and sale of securities through recognised stock exchanges.
• Introduction: Under the Finance Act, 2004, to ensure transparency and curb tax evasion in capital markets.
• Objective: Replace complex capital-gains tracking with a small, upfront levy to counter under-reporting and increase tax buoyancy.
• Administered by: Central Board of Direct Taxes (CBDT), Ministry of Finance.
• Scope: Applies to-

1. 1. Equity shares of listed companies
   2. Derivatives (futures & options)
   3. Equity-oriented mutual funds and ETFs.

• Purpose:
  • Simplify tax collection from capital market participants.
  • Create a traceable, automated tax mechanism.
  • Generate steady revenue while discouraging speculative trading.
• Nature: A transaction-based tax (TBT) collected automatically at the time of trade, irrespective of overall profit or loss.

• Distinctive features:

• • • Applies even on loss-making trades payable merely for conducting a transaction.
    • Non-refundable and non-adjustable, unlike TDS.
    • Raises transaction costs for high-frequency traders.

• Imposition of STT:

• • Mode of collection: Automatically deducted by stock exchanges on every taxable trade and deposited into the government account; Ensures near-universal compliance and minimal evasion.
  • Rate & coverage: Varies across instruments and between buy/sell transactions; Periodically revised through Union Budgets.

Key Grounds of Challenge:

• Violation of Fundamental Rights:

1. 1. Article 14 (Equality): Unequal treatment; tax imposed irrespective of gain or loss.
   2. Article 19(1)(g) (Right to Trade): Penalises the act of trading itself.
   3. Article 21 (Livelihood & Dignity): Non-refundable levy burdens small traders.

• Double Taxation: Traders already pay Capital Gains Tax on profits; STT adds a second layer on the same transaction.
• Arbitrariness / Lack of Proportionality: Taxing even unprofitable transactions violates the principle of reasonable classification and fiscal fairness.
• No Refund or Adjustment Mechanism: Absence of provision similar to TDS refunds; creates permanent loss even when income is negative.
• Changed Circumstances: With digital audit trails, PAN-linked demat accounts, and near-complete transparency, the original rationale (to curb evasion) may no longer hold.

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