Securities Transaction Tax (STT); GST Exemption on Securities — Law of Taxation Notes

Securities Transaction Tax (STT); GST Exemption on Securities

When you buy shares on the stock exchange, no GST appears on the contract note — yet a small levy called STT does. Why does GST skip securities but a separate tax catches them? Because “securities” are deliberately kept outside the definition of goods and services, and Parliament taxes their trading through its own dedicated levy instead.

Two ideas that go together

A. Why securities are outside GST. GST is a tax on the supply of goods or services. But “securities” (shares, bonds, derivatives, units) are expressly excluded from both definitions:

“Goods” (s.2(52) CGST) means every kind of movable property other than money and securities.
“Services” (s.2(102) CGST) means anything other than goods, money and securities.

So the sale/purchase of securities is neither a supply of goods nor of services, and no GST applies to the transaction value of the securities. (GST does apply to the broker’s service charge — the brokerage — because that is a service.) Trading in securities is a financial/capital-market transaction, not consumption, so taxing it under a consumption tax like GST would be inappropriate.

B. Securities Transaction Tax (STT). Instead, securities trading is taxed by a separate, small levy — the Securities Transaction Tax, introduced by the Finance (No. 2) Act, 2004. It is:

a tax on the value of taxable securities transactions done through a recognised stock exchange — purchase/sale of equity shares, units of equity mutual funds, and derivatives;
levied at very low prescribed rates on the transaction value;
collected by the stock exchange / broker at the time of the transaction and paid to the government (a simple, leak-proof collection);
designed to make capital-gains collection easier and to tax market transactions without a high rate.

Interaction with income tax: because STT is paid, long-term capital gains on listed shares enjoyed (historically) an exemption, and short-term gains on STT-paid shares are taxed at a concessional rate — STT and income tax dovetail.

🧩 WORKED EXAMPLE — GST and STT on a share purchase

Facts. An investor buys listed shares worth ₹1,00,000 through a broker, who charges brokerage of ₹500.

Rule. The shares are “securities”, excluded from goods/services, so no GST on the ₹1,00,000; but the brokerage is a service, so GST applies to the ₹500. STT applies to the securities transaction value.

Apply. GST is charged only on the ₹500 brokerage (say ₹90 at 18%); STT is levied on the ₹1,00,000 at its low prescribed rate; the exchange collects the STT.

Conclusion. No GST on the shares themselves; GST only on the broker’s fee; STT separately on the trade — the securities are outside GST but caught by STT.

In Simple Terms: Shares and bonds are kept out of GST — the definitions of “goods” and “services” both exclude “securities” — so buying/selling them carries no GST (only the broker’s fee does). Instead, a small Securities Transaction Tax is charged on stock-exchange trades and collected by the exchange. So securities escape GST but not tax altogether.

flowchart TD
    ROOT["Sale/purchase of securities"]:::root
    ROOT --> A["'Securities' excluded from goods s.2(52) & services s.2(102)<br/>= NO GST on the securities"]:::good
    ROOT --> B["Brokerage is a service = GST applies to the fee"]:::leaf
    ROOT --> C["STT (Finance Act 2004)<br/>small levy on exchange trades, collected by exchange"]:::leaf
    classDef root fill:#FFF8DC,stroke:#000,stroke-width:1px,color:#000;
    classDef leaf fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    classDef good fill:#E3F6E3,stroke:#1b7a1b,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

Case Laws

All India Federation of Tax Practitioners v Union of India (2007) — upheld the levy of service tax, holding Parliament’s competence to tax services/transactions (under the residuary and specific entries) to be wide; cited here by analogy for the principle that STT is a valid Union levy on securities transactions, distinct from a tax on income.

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