The recent hike in the Securities Transaction Tax (STT) will force many foreign portfolio investors (FPIs), who are unable to claim treaty benefits, to relocate their operations to India. This would allow the FPIs to adjust the STT already paid against their tax outgo , and could result in huge savings, experts said.
STT is a fixed cost of doing business in the equity markets since it is deducted in advance on each transaction irrespective of whether the assessee makes a profit on the trade.
Last week, the government hiked STT on futures and options (F&O) in equity and commodity markets through an amendment in the Finance Bill. STT on futures was raised by 25 per cent and on options trade by 23.52 per cent.
In India, any income earned through F&O trading by FPIs is considered as business income and taxed at the peak rate of 25.17 per cent, including surcharge. But the advantage of categorising earnings as business income is that STT already paid can be adjusted against the tax due on profits.
Also read: What is the impact of hike in STT?
STT collection
For the current financial year ending March 31, the government has estimated an STT collection of more than Rs 20,000 crore. Even if 25 per cent or 50 per cent of this total STT collection is adjusted against business income by stock market traders, it would be a huge saving in tax outgo.
There are more than 10,000 FPIs registered with market regulator SEBI, but not all of them are in a position to avail of the benefit of the double tax treaty that India has with a few countries. The treaty can reduce FPI tax by 90 per cent or even zero, based on which country they are playing from.
Also read: Why F&O trading will be challenging for retail investors
But the provisions and criteria to claim treaty benefits are stringent, resulting in many FPIs staying out of it. Introduction of laws like “GAAR (General anti avoidance rule), Principal Purpose Test, Multilateral Instruments, etc, has made claiming treaty benefits extremely difficult. In such a scenario, when the hike in STT starts pinching FPIs that are large traders in India, the best option for them is to locate their operations here. It will save them tax and other hassles,” said Suresh Swamy, Partner, PW & CO LLP.
Thus, the hike in STT will push FPIs to relocate their operations to India and cut down on taxes drastically.