India's securities transaction tax (STT) collections are showing signs of strain this financial year, with regulatory tightening in the Futures and Options (F&O) segment, subdued trading volumes and volatile market conditions combining to slow revenue growth. If current trends continue, STT collections are likely to fall short of Budget estimates, a situation not witnessed since FY20.
Data released by the Income Tax Department indicate that STT collections stood at around Rs 44,500 crore as on January 11. To meet the Budget estimate, collections of more than Rs 33,400 crore would be required in the remaining 79 days of the fiscal, a target that market participants say appears increasingly difficult to achieve.
A tax expert pointed out that recent regulatory measures have had a visible impact on market activity. "The moderation in F&O volumes following the STT rate hike and regulatory tightening seems to have played a significant role. Unless there is a sharp revival in trading volumes or a strong market rally, actual STT collections are likely to undershoot the Budget estimate," she said.
What Is STT and Why It Matters
Introduced in 2004, STT was designed to curb capital gains tax evasion by imposing a levy on securities transactions. It is a direct tax, charged on the transaction value of securities such as equity shares, derivatives and equity-oriented mutual funds, excluding commodities and cash markets.
Governed by the Securities Transaction Tax Act, STT is collected at the time of transaction, making it an unavoidable cost for both buyers and sellers. The tax also applies to unlisted shares sold under an offer for sale (OFS) that are subsequently listed on recognised stock exchanges.
Slower Trading Volumes Signal Cautious Sentiment
According to another tax expert, trading volumes across several brokerage platforms are lower than anticipated, reflecting a cautious investor approach amid domestic and global uncertainties. "SEBI's tighter regulations on the derivatives segment appear to have reduced speculative trading activity. While the government remains optimistic about meeting overall direct tax targets due to strong advance tax collections, the gap in STT receipts warrants close evaluation ahead of the Budget," he said.
Volatility, FPI Outflows and Shift to Safe Havens
Market volatility has been a defining feature of the current fiscal year. Global macroeconomic headwinds, fluctuating interest rate expectations and intermittent foreign portfolio investor (FPI) outflows have kept Indian equity markets range-bound and sensitive to global cues.
A third tax expert noted that escalating geopolitical tensions have prompted investors to shift allocations towards safe-haven assets, particularly gold and silver, at the expense of broader equity exposure. "As risk appetite for equities has softened, funds have moved to metals and other asset classes that do not attract STT. At the same time, tighter risk management norms in the F&O segment have curtailed high-frequency speculative trades, which traditionally contribute significantly to STT collections," he said.
Budget Targets Under Review
Experts believe that the current shortfall also reflects the ambitious nature of Budget estimates, which were largely extrapolated from the unusually strong STT collections recorded in the previous fiscal year. "The combination of regulatory tightening, subdued equity participation and elevated volatility has widened the gap between projected and actual STT collections," the expert added.
As the government prepares for the upcoming Budget, policymakers may need to reassess assumptions around market-linked tax revenues, particularly in a year marked by heightened uncertainty and regulatory recalibration.
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