Bombay high court. Photo: HT.
Bombay high court. Photo: HT.

Bombay HC seeks clarity on derivatives STT collection

The brokers' lobby has moved court against Sebi and NSE for holding brokers responsible for collecting the STT on physical delivery of derivatives

Mumbai: The Bombay High Court has directed Additional Solicitor General (ASG) Anil Singh to take instruction from the Central Board of Direct Taxes (CBDT) to clarify whether the Sebi and National Stock Exchange (NSE) are holding brokers responsible for collecting the securities transaction tax (STT) on the physical delivery of derivatives.

On Thursday, the division bench of the Bombay High Court comprising Justice B.R. Gavai and Justice M.S. Karnik said that the government needed to clarify its position in the matter within a week. The court will hear the matter on August 28.

“We are more like a toll naka and the government is asking us to collect a toll after cars have passed by," argued senior counsel Birendra Saraf, who was appearing for the Association of National Exchanges Members of India (ANMI).

The brokers’ lobby has moved court against the capital markets regulator Securities and Exchange Board of India (Sebi) and NSE for holding brokers responsible for collecting the STT on physical delivery of derivatives. The brokers’ association has made the NSE, Sebi and the CBDT parties in the matter.

The court was hearing a plea filed by the ANMI against the NSE after the exchange decided to levy the STT at 0.1% on derivative contracts for stocks that are settled physically. This is 10 times higher than the 0.01% STT levied on stocks that are settled in cash.

Sebi’s lawyer, senior advocate Gaurav Joshi, informed the court that the capital market regulator had also sought clarification from the CBDT in this regard after the Securities Appellate Tribunal (SAT) had asked parties to go to the relevant forum to remove ‘ambiguity’ in the matter.

The broker lobby’s contention in the matter is that there is currently no provision in the Finance Act to tax derivative trades on physical delivery.

Also, the ANMI feels that the exchange should not commence physical delivery in the F&O segment unless it issues legal indemnity to its members from any future claims made by the Centre for non-collection of STT on F&O delivery.

The genesis of the dispute lies in the NSE’s circular in April that had listed 46 stocks whose derivatives contracts result in physical delivery of shares.

There has been confusion both over the levy and the rate of STT that should be levied on these transactions as it involves various legs of trade, such as buying and selling in futures, and final settlement against delivery, where the entire amount has to be paid.

This is the second legal forum that the ANMI has approached since the emergence of the dispute. Before moving the Bombay High Court, the ANMI had moved the Securities Appellate Tribunal (SAT) seeking clarity on the matter. However, the SAT directed the ANMI to approach other “appropriate forum for seeking remedy against the impugned circular at the earliest."

Nishit Dhruva, managing partner of the law firm MDP & Partners, who is representing the ANMI in the case, and Vikram Trivedi, managing partner of the law firm Manilal Kher Ambalal & Co, who is advising NSE in the case, confirmed the development but refused to divulge any details since the matter is sub judice.

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