Guide on GST Exemption on Sale and Purchase of Securities

While people carry out transactions in securities, most are always in a dilemma as to tax on the sale of securities. The taxation on the sale of securities depends upon the head under which the income is classified. While the transaction in securities is itself liable to the Securities Transaction Tax, the gains are taxable separately. Here’s a complete guide to help you determine and plan tax on the GST exemption on sale and purchase of securities.

Types of taxes on the Sale of Securities

The sale of securities can attract the following taxes:

• Securities Transaction Tax
• Income Tax that can include:
• Long Term Capital Gains or,
• Short Term Capital Gains or,
• Business Income.

It shall be noted that the GST is not applicable on the transaction in securities as securities are outside the purview of both goods and services. Only arranging or facilitating transactions in securities is liable to GST.

Let’s uncover the above taxes in detail!

1)  Securities Transaction Tax
STT was introduced to collect taxes on financial market transactions. It is a direct tax levied on the sale and purchase of securities listed on a recognized stock exchange in India. STT is regulated by the Securities Transaction Tax Act. The STT Act has listed all the transactions that are subject to STT as well as the values on which the STT shall be levied.

2) Income Tax

Under the Income Tax Act, there are three ways to determine the taxation on the sale of securities depending upon the classification of income on such sale.

Business Income Vs. Capital Gains

Classification of income on the sale of securities has always been a debatable issue. While there is no universal principle that lays down absolute classification criteria, Circular No. 06/2016 dated 29-02-2016 is important in this regard. Following points shall be considered while classifying income on the sale of securities:

• If the trading in securities is significant, then the gains and losses arising from the same shall be treated as business income or losses.
• If the taxpayer elects to treat the securities held as stock in trade, then the income arising therefrom shall be treated as business income.
• In case the securities are held for more than 12 months and the assessee elects to classify the gains arising therefrom as capital gains, then the assessing officer shall not dispute the assessee’s election. However, it shall be noted that the stand taken by the assessee in a particular assessment year shall be applicable for subsequent assessment years. That means, once the assessee classifies the income on the sale of securities as capital gains, then it cannot be classified as business income in subsequent assessment years. 
• In other cases, the nature of the transaction shall be decided to keep in line with CBDT’s circular.
• In regards to the unlisted shares, the same shall be treated as capital assets irrespective of the period of holding.

A.  Tax on Business Income from Sale of Securities
If the income from the sale of securities is classified as business income, then it shall be taxable as per the tax rate applicable to the person dealing in securities. An important criterion to determine when considering taxation as business income is whether the income is speculative business income or non-speculative.

The income tax act has defined speculative transactions under section 43(5) to cover those transactions in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. However, derivatives and commodity derivatives have been excluded from this definition. 

Therefore, gains or losses from derivative trading shall be considered non-speculative business income or loss. Further, as intraday trading does not involve actual delivery, therefore, it will be considered a speculative business.

The above can be summed up as under:

• The transaction involves delivery: non-speculative business
• Transaction does not involve delivery (for e.g., intraday): speculative business
• Derivative and Commodity Derivative trading: non-speculative business

The losses from speculative business can be set off against income from speculative business only. Therefore, losses incurred from intraday trading can’t be set off against any other income except profits from intraday trading. If an investor or trader does both F&O and intraday trading, then both shall be considered separate businesses.

Tax audit requirement arises when the aggregate turnover exceeds Rs. 10 crores. In the case of derivative and intraday trading, turnover shall be determined in the following way:

• In the case of F&O transactions, the aggregate of favorable (profit) and unfavorable (losses) differences shall be taken as turnover. It shall also include option premiums received.
• For intra-day trading as well, this concept is followed and is known as ‘Absolute Profit’. Absolute profit is the sum total of the profits and losses from intraday trading.

Practical Example:

A trader buys 5 shares at Rs. 300 on 04-04-2022.
He sells those shares at Rs. 320 on the same day.
Profit = 5*(320-300) = Rs. 100.

Now, the trader buys 10 shares at Rs. 400 on 05-05-2022.
He sells those shares at Rs. 370 on the same day.
Loss = 10*(370-400) = Rs. 300. 
Therefore, total turnover = absolute profit = Rs. 100 + Rs. 300 = Rs. 400

B. Capital Gains Tax on Sale of Securities

Capital gains tax on securities depends upon whether the securities are long-term or short-term capital assets. The following are the classification criteria for securities:

Asset	Period of Holding	Classification
Listed Security Units of Unit Trust of India Units of equity-oriented funds zero-coupon bond	Not more than 12 months	Short-term capital asset
	More than 12 months	Long-term capital asset
Unlisted shares	Not more than 24 months	Short-term capital asset
	More than 24 months	Long-term capital asset
Other securities (including debt-oriented mutual funds)	Not more than 36 months	Short-term capital asset
	More than 36 months	Long-term capital asset

Capital Gains Tax Rates on Sale of Securities

Sr. No.	Particulars	Assessee Type	Type of Income	Tax Rate
1	Income from the following short-term capital assets on which STT has been paid: equity share units of an equity-oriented mutual fund units of a business trust	Both Residents and Non-Residents	STCG u/s 111A	15% Further, in the case of resident individuals and HUF, LTCG can be adjusted against the basic exemption limit of Rs. 2.50 lakhs.
2	Income from other short-term capital assets	Both Residents and Non-Residents	STCG	As per the tax normal tax rate applicable to the assesses.
3	Income from the following long-term capital assets on which STT has been paid: equity share units of an equity-oriented mutual fund units of a business trust	Both Residents and Non-Residents	LTCG u/s 112A	10%. However, if the LTCG is less than Rs. 1 lakh, then no tax shall be levied on such gain. Further, in the case of resident individuals and HUF, LTCG can be adjusted against the basic exemption limit of Rs. 2.50 lakhs.
4	Income from long-term capital assets other than those covered under section 112A (point 3 above).	Resident Individual and HUF Domestic Companies	LTCG u/s 112	20% Here also, in the case of resident individuals and HUF, LTCG can be adjusted against the basic exemption limit of Rs. 2.50 lakhs.
5	Income from long-term capital assets other than those covered under section 112A (point 3 above).	Non-resident (not a company) or a foreign company.	LTCG u/s 112	20%
6	Income from the transfer of unlisted shares or securities of a company in which the public is not substantially interested (i.e., private companies).	Non-resident (not a company) or a foreign company.	LTCG u/s 112	10% without availing the benefit of: 1st proviso to Section 48 (special method to compute capital gains in case of non-residents) and 2nd proviso to Section 48 (indexation).
7	Listed securities (excluding units) and zero-coupon bonds.	Both Residents and Non-Residents	LTCG u/s 112   Option-1: LTCG on securities without availing indexation benefit under the 2nd proviso to section 48	10%
		Both Residents and Non-Residents	Option-2: LTCG with indexation benefits under the 2nd proviso to section 48.	20%

 

Following were the tax implications on GST exemption on sale and purchase of securities. In case you have any queries, please feel free to contact the ASC Group.