The Financial Transaction Tax or Financial Transaction Tax was introduced in 2004 when the Long Term Capital Gains Tax (LTCG or the tax paid on any gains from shares held for more than one year) was removed by the then Finance Minister Prime Minister Chidambaram. Since it is collected up front by stock exchanges, STT is much easier for the government to collect than LTCG which requires investors to voluntarily authorize and pay. In Budget 2018, LTCG was provided at 10% for gains over Rs 1lk, but STT was not reduced.
For over 15 years now, first as a trader and now as a broker, I wake up every budget day hoping for the STT to be removed or lowered, but if anything only goes up. For very active traders, STT is a very high cost. In terms of transaction taxes, we are probably among the first few markets in the world.
Historical STT in India
|STT – Securities Transaction Tax on Equity Derivatives (%)|
|Date||cash delivery||Cash during the day||Futures||option||Options Executed (Contract Value)|
|Accused||Buying and selling||sale only||sale only||sale only||everyone|
|October 1, 2004||0.075||0.015||0.01||0.017 (contract value)||0.01|
|June 1, 2005||0.1||0.02||0.0133||0.017 (contract value)||0.0133|
|June 1, 2006||0.125||0.025||0.017||0.017 (contract value)||0.017|
|June 1, 2008||0.125||0.025||0.017||0.017 (premium value||0.125|
|June 1, 2013||0.1||0.025||0.01||0.017 (premium value)||0.125|
|June 1, 2016||0.1||0.025||0.01||0.05 (premium value)||0.125|
|CTT- Commodity Transaction Tax on Commodity and Commodity Derivatives (%)|
|Date||futures contracts (sell)||Options (Sell – Premium Value)||Selling an exercised option (contract value)|
|July 1, 2013||0.01||0.05||0.0001|
No STT on currency derivatives
Taxes paid by Zrudha’s clients
If you add STT, Stamp duty and GST, Zerodha customers end up paying approximately Rs 200 crore per month or approximately Rs 2,500 crore annually in transaction taxes. This is outside income tax (10% for LTCG over 1lk, 15% for STCG, and according to the Intra-Day Income Tax Panels & F&O) that must be paid on any winnings. Of course last year was more active as well, and it could have been a lot less before 2020.
The effect of transaction tax on customers
Transaction costs eat up business capital. If you add impact costs to this (money lost due to supply and demand spread), I think most active traders lose more money to transaction tax + impact cost than to the markets. So lower transaction tax is definitely good for customers, not only directly but also indirectly because lower transaction tax increases liquidity and thus reduces impact cost as well.
The counter point of the above is that lower costs can cause clients to trade more often and frequently, leading them to take on higher risks, which may not be good either.
The effect of STT on trading behavior
We mentioned this in your post,
Until 2008, trading was mostly in futures, but it was mostly options today. The interest in options surged once the minimum contract value for F&O rose from 2 liters to 5 litres around November 2015, which meant that small traders who did not have enough margin to trade futures contracts switched to options trading. It also helped STT options trading that was downgraded from STT on Strike + Premium to only Premium from 2008. This trend only continued after daily leverages were restricted to margins in 2020.
While the increases in margins for futures and stocks have certainly helped the popularity of options trading, there is also a section of market participants who believe that a lower STT for options compared to futures or stocks is also to blame. As you can see from the above table, the STT of options was (correctly) reduced from contract value to premium in 2006. While the surge in options trading only began in 2015 when the minimum contract value of F&O contracts rose, it started Trending upwards from 2007 when the options STT was lowered. BTW, STT hasn’t really caused a spike in currency derivatives trading volumes.
Here we hope that STT will cut this budget.