Securities tax mop-up at 70% of Budget target amid market rally

More than 70 per cent of the budgetary target for collection of the securities transaction tax (STT) has been achieved by August itself, on the back of increased retail participation in the stock market. The STT collection as on August 12 stood at Rs 8,800 crore, against the target of Rs 12,500 crore. In fact, the growth is 64 per cent over the mop-up of Rs 5,291 crore until August 2020.

"The sharp increase in the STT collection can be attributed to an overheated market," J B Mohapatra, chairman of the Central Board of Direct Taxes, told Business Standard.

The STT is a direct tax payable on the value of taxable securities transactions done through a stock exchange. It is levied at 0.1 per cent of turnover for delivery-based equity transactions, while for intraday transactions, the STT for purchase is nil; for sale, it is 0.025 per cent of the turnover. The net direct tax collection witnessed 87 per cent YoY growth to Rs 3.56 trillion until August 12. Gross collection at Rs 4.05 trillion was 46.1 per cent higher YoY and refunds were down nearly 32 per cent.

"This is the best year in terms of direct tax collection in the past last four years. That's because some sectors are doing wonderfully well. Maybe there is pent-up demand in high revenue areas. Generally, corporates are doing well," said Mohapatra.

Sectors like infrastructure, health care, pharma, trade, chemicals, fertilisers and logistics are contributing to higher revenues, he said.

"I am keeping my fingers crossed over the full-year collection. We are looking at the September quarter for the advance tax instalment, which should give us another 30 per cent," said Mohapatra. 

The Budget had pegged revenues from direct taxes at Rs 11.08 trillion, necessitating 17 per cent over the 2020-21 actuals. Last year, the direct tax mop-up at Rs 9.47 trillion was 9.7 per cent lower than the previous year due to the impact of the pandemic but exceeded the revised estimate of Rs 9.05 trillion.

Aditi Nayar, chief economist, ICRA Ratings said that the fact that a considerable proportion of the budget estimates for several tax collections has already been achieved, suggests that the targets themselves were conservative despite the unprecedented second wave of covid 19.

A report by State Bank of India recently pointed out that retail participation in the Indian stock market was rising and that 4.47 million retail investor accounts were added during the first two months of this financial year.

The number of individual investors in the market increased by 14.2 million in FY21, with 12.25 million new accounts at CDSL and 1.97 million in NSDL, it had said. Also, the share of individual investors in the turnover on the stock exchange rose to 45 per cent at the end of FY21 (the highest in a decade) from 39 per cent in March 2020, as shown by the NSE data.

This can be attributed to declining savings avenues because of falling interest rates and a significant increase in global liquidity. Around 9 million new retail investors came up in FY21, according to the NSE data. Besides, the BSE data showed that it added 17.8 million new investors from May 2020 until early May this year. 

Rajat Mohan, Partner, AMRG Associates, said the bull run on the stock market, spearheaded by IT and pharma companies, has led to increased volume of transactions by FIIs, as well domestic investors, resulting in the improved STT collection. "Market experts believe that increased money circulation and lower rates of interest will continue to fuel the stock markets and the annual target collection for STT can be met in the calendar year 2021 itself," said Mohan.

Rakesh Nangia, chairman, Nangia Anderson India, said there have been massive inflows of funds in the capital market by all classes of investors, resulting in the STT collection jump and if the trend continues, the government's collection of STT may double this year. "The quantum of increase in direct taxes has been due to the bounce-back in economic activity and a double-digit growth in a few sectors,” said Nangia.

The direct-tax-to-GDP ratio in the first quarter of 2021-22 increased to 5.14 per cent, compared with 3.29 per cent over the last two years, riding on the back of growth in the corporation tax and personal income tax collections.