However, the tax department issued a clarification that the settlement of derivative contracts by taking delivery of shares will not be different from the procedure followed for equity contracts.
The tax incidence on the settlement of derivative contracts by taking physical delivery of securities is set to increase tenfold when compared to those who settle in cash. The Bombay High Court was apprised by the Central Bureau of Direct Taxes (CBDT) that physical settlement in the equity and derivatives segments will attract the same securities transaction tax.
The delivery of shares worth Rs 1 crore will now be taxed Rs 10,000 as opposed to Rs 1,000 previously.
A two-member bench comprising of Justice MS Karnik and BR Gavai had sought an explanation from the taxman following a petition filed by members of the National Stock Exchange (NSE). The ambiguity over the tax liability on securities transactions came to the fore after the exchange moved 46 stocks in the futures and options segment to the compulsory delivery category.
This change was made applicable since July. The market regulator also passed an order whereby equity derivatives were ordered to shift to physical settlement in a staggered manner.
The prevailing rate in the derivatives segment will be the benchmark in collecting tax from clients. Members of the exchange will be liable to pay the differential in case the taxman makes an upward revision of the rate.
However, the tax department issued a clarification that the settlement of derivative contracts by taking delivery of shares will not be different from the procedure followed for equity contracts.
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