Brokers to approach HC over STT on physically-settled derivative contracts

NSE decided last month to levy STT at 0.1% on derivative contracts of stocks that are physically settled

Stockbrokers are approaching the Bombay High Court to seek a resolution on the impasse surrounding the levy of securities transaction tax (STT) on physically-settled derivative contracts. 

The brokers' lobby, Association of National Exchanges Members of India (Anmi), had recently moved the Securities Appellate Tribunal (SAT) to provide clarity on the issue.    

Currently, there is no provision in the Finance Act to tax derivative trades on physical delivery and Anmi believes that any attempt to collect the same by the National Stock Exchange of India (NSE) upfront shall become an illegal act.

In a letter to the Securities and Exchange Board of India (Sebi) dated July 17, Anmi had said that the exchange should not commence physical delivery in the F&O segment unless it issues a legal indemnity to its members from any future claims made by the Government of India for non-collection of STT on F&O delivery. It also noted that there is currently no law to deal with gains/losses resulting from delivery transactions in the F&O segment.  

Last month, the NSE decided to levy the STT at 0.1 per cent on derivative contracts of stocks that are physically settled. This is 10 times higher than the 0.01 per cent STT levied on stocks that are cash-settled. In April, the NSE had issued a list of 46 stocks whose derivatives contracts result in physical delivery of shares. 

The exchange had further said that in the event that the Central Board of Direct Taxes (CBDT) issues any clarification or amendment in this regard, the exchange reserves the right to recover additional STT from broker members as notified by the CBDT. The exchange is yet to get the necessary clarifications from the CBDT.

The July series derivatives contracts was the first month where contracts were physically settled. However, stocks that were headed for physical settlement witnessed high rollover as brokers advised their clients to either roll over or square off their positions to avoid taking physical delivery.

In April, Sebi had made physical settlement mandatory for stocks that failed to meet certain criteria to crack down on excessive speculation in the derivatives market.

Derivatives have enjoyed favourable tax treatment compared to cash markets. Intra-day transactions in the cash market are subject to 0.025 per cent STT, while delivery transactions are charged at 0.1 per cent. STT on sales of future contracts is 0.01 per cent, while on sales of options it is 0.05 per cent.