Discover the impact of the recent Security Transaction Tax (STT) hike on Foreign Portfolio Investors (FPIs). Explore the background, analysis, and potential relocation scenarios for FPIs in response to the increased STT rates. Disclaimer: This article provides personal views and does not constitute professional advice.
Introduction to STT
We all know that recently the Honorable Finance Minister came up with certain amendments in Finance Bill 2023 and one of them is hike in rate of Security Transaction Tax (STT) in Equity and Commodity segment of Future & Options Market.
Meaning of STT
STT is a type of turnover tax where investors has to pay a small amount of total value of consideration paid or received in every transaction of buy and sell.
Background
STT was introduced in the Budget of 2004 and implemented with effect from 1st Oct 2004. The objective behind the levy of STT is to mitigate tax evasion as the same is taxed at source. Stocks, futures, option, mutual funds and exchange traded funds come under the ambit of STT.
The STT applicable in the case of intraday transaction will be different from the one applicable in the case of delivery transaction. Likewise, the STT applicable in the case of buying a security will be different from the one applicable in the case of selling the security.
Foreign Portfolio Investors
When investor of one country hold financial assets of another country like Stocks, Bonds, Exchange Traded Funds, American Global Depository receipts (ADR),Global Depository Receipts (GDR) etc. According to UNCTAD World Investment report FDI was all time high in 2020 USD64 billion decreased to USD 44billion but again increased in 2022 up to USD 514 billion. India ranked 5th position in top 20 FDI host economies. India major Investors are Mauritius, Singapore, the U.S., the Netherlands, Japan, the U.K., Germany, and the United Arab Emirates and major portion of FDI is routed to service oriented industries, Computer Hardware and Software, Telecommunication Services, Automobile industry, Construction, and Chemicals.
Analysis
In Current Scenario F&O is treated as capital asset for FPI therefore the tax implications would be 30% (STCG) / 10% (LTCG) or rate as per DTAA whichever is beneficial, depending upon period of holding plus As per section 48 of income tax act only those expense which are in connection with transfer shall be allowed as expense it means only brokerage shall be allowed as deduction not STT. On the other hand for an Indian investor F&O income can be treated as business income . Therefore the major difference exist regarding allowance of expense.
Now The recent hike in STT will encourage the FPI to relocate their operations to India This will allow them to claim STT paid against tax outgo from F&O trading .FPI can relocate in 2 forms either as Permanent Establishment of A Foreign Establishment or a separate Company can be incorporated as Domestic Company. STT is a fixed cost of doing business in Equity market and it is deducted from consideration even it is not profitable. Govt. has raised STT by 25% in Equity segment of Futures, and 23.52% rise in Commodity segment. In India, F&O Trading income considered as business income and the major benefit of this is that we can claim STT as expenditure hence entire payment can be claimed as expense. It is also required to note that most of FPI’s could not get benefit of treaty between India and their country because of stringent provisions of treaty.
If we take an example to understand it, Government estimated STT collection for the March month around 20,000 crore Rupees and if 25% of investors claim it as expense then huge amount of tax will save.
Conclusion
It will be interesting to see that how FDI Curve moves in 2023 after this amendment. Whether Investors will consider this as favorable one or not.
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Disclaimer:- These are personal views of author and not constitute any professional advice.
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