Tax on physical delivery of derivatives: SAT disposes brokers’ plea

The Securities Appellate Tribunal (SAT) has disposed of the plea of Association of National Exchange Members of India (ANMI) on levy of Securities Transaction Tax (STT) on physical settlement of derivative stocks. The NSE on July 17 had issued an order to levy 0.1% STT on physical delivery of stocks from July 26. Accordingly, 46 scripts were identified for compulsory physical settlement after the expiry of the ongoing cycle of derivatives contracts. The NSE circular clearly stated it was collecting dues only to stay prepared in case the Central Board of Direct Tax (CBDT) imposed STT with a retrospective effect. However, brokers unhappy with the levy moved the SAT noting there is no provision in the Finance Act to tax derivative trades in delivery. The CBDT, on the other hand, is not clearing its stand on whether STT should be levied on physical delivery of stocks, which is creating ambiguity in the market. The NSE circular said, “Without prejudice to the above, in the event if CBDT issued any clarification or amendment in this regard, in addition to or contrary to the above position, the exchange reserves right to recover such additional STT from the members effective from the date as may be notified by the CBDT.” Further, NSE argued its order is pursuant to a circular issued by SEBI on April 11, regarding “review of a framework for stocks in derivatives segment”. The ongoing cycle of derivatives contract is for three months (April-June, 2018) and the new framework would become effective after contracts expire on July 26, although this was not stated clearly in the SEBI circular. Following the NSE circular, the appellant made an immediate representation citing ambiguity regarding the rate of applicable STT arising out of the circular. Brokers are now planning to approach the high court on July 30 against the NSE’s circular. The lawyer representing ANMI, PN Modi said there is complete ambiguity regarding the rate of STT to be levied on physical settlement of stock derivatives. This is the reason why NSE itself has given a caveat stating that future obligation, if any, based on the decision awaited from CBDT will have to be honoured by the members. and it is impractical because clients come and go and they need clarity regarding the rate of STT to be paid which would enable them to deposit the STT collected with the exchange. Similarly, it is mandatory on the part of the members/brokers to prepare documentation/contract notes based on the actual STT applicable to such contracts. However, NSE and SEBI have mentioned that the Finance Act of 2004 (Section 98) provides the rates of STT applicable to various transactions in securities. These rates vary according to the type and nature of the transaction and are in the range of 0.001% and 0.2% (since 0.1% is charged on both the buyer and seller for delivery based contracts).