ETBudget Roundtable | STT and dividend double taxation need a review, says WhiteOak’s Aashish Somaiyaa

The call by WhiteOak CEO Aashish Somaiyaa for a review of the Securities Transaction Tax (STT) and dividend taxation framework ahead of Budget 2026 brings to the forefront critical issues concerning India's capital markets, investor sentiment, and government revenue. This discussion is vital for understanding the delicate balance between fiscal policy and economic growth. **Background Context and Historical Evolution:** India's taxation landscape for capital markets has seen significant evolution. The Securities Transaction Tax (STT) was introduced in 2004 by then Finance Minister P. Chidambaram. Its primary objective was to simplify the tax regime for capital market transactions and to curb tax evasion, particularly for short-term capital gains. Initially, STT was introduced as a replacement for long-term capital gains tax (LTCG) on equity shares and equity-oriented mutual funds, making such gains exempt from tax if STT was paid. However, this exemption was later removed, and LTCG was reintroduced at 10% on gains exceeding ₹1 lakh without indexation benefit in Budget 2018, while STT continued. This created a situation where both taxes applied to certain transactions. Dividend taxation also has a complex history. For many years, India operated under a Dividend Distribution Tax (DDT) regime, where companies paid tax on dividends before distributing them to shareholders. This meant that the dividend income was exempt in the hands of the shareholders. However, the DDT was often criticized for being a form of 'double taxation' at the corporate level, as profits were taxed first at the corporate level and then again when distributed as dividends. Recognizing this, and to align with international best practices and make India a more attractive investment destination, the government abolished DDT in Budget 2020. Since April 1, 2020, dividends are taxable in the hands of the recipient shareholders at their applicable slab rates, thereby shifting the tax burden from the company to the individual investor. **What Happened and Key Stakeholders:** Aashish Somaiyaa's argument is that the current framework of STT and the individual taxation of dividends effectively amounts to 'double taxation' and creates 'structural market frictions'. He suggests that this scenario discourages investment and needs a comprehensive review. The timing, ahead of Budget 2026, indicates a strategic push for policy changes. The key stakeholders involved in this debate are: 1. **Government (Ministry of Finance, CBDT):** As the policymakers and revenue collectors, they must balance the need for tax revenue with promoting capital market growth and investor confidence. Any changes would impact the national exchequer. 2. **Investors (Retail, High Net-worth Individuals, Foreign Institutional Investors - FIIs):** They are directly impacted by these taxes. Higher taxes can reduce net returns, potentially deterring investment. Somaiyaa specifically mentions macro stability driving FII confidence, highlighting their sensitivity to tax regimes. 3. **Corporates/Companies:** While not directly paying STT or individual dividend tax, their ability to raise capital and attract investors is indirectly affected by the overall attractiveness and efficiency of the capital market. 4. **Stock Exchanges, Brokers, and Asset Management Companies (AMCs) like WhiteOak:** These entities facilitate market transactions and represent investor interests. They often advocate for policies that enhance market liquidity and efficiency. **Significance for India and Broader Themes:** This discussion holds immense significance for India's economic trajectory. An efficient and investor-friendly capital market is crucial for several reasons: * **Capital Formation:** It enables companies to raise capital for expansion, innovation, and job creation, directly contributing to economic growth. * **Investor Confidence:** A predictable and fair tax regime boosts confidence among both domestic and foreign investors. When investors perceive 'double taxation' or high transaction costs, it can lead to capital flight or reduced inflows, impacting India's position as an attractive investment destination. * **Market Liquidity:** High transaction costs can reduce trading volumes, impacting market liquidity and price discovery. * **Atmanirbhar Bharat:** Somaiyaa rightly identifies 'Atmanirbhar Bharat' (Self-Reliant India) as a continuity-led strategy. A robust domestic capital market, fueled by strong investor participation, is fundamental to achieving self-reliance by reducing dependence on external capital and fostering indigenous growth. * **Fiscal Policy and Economic Growth:** The government's fiscal policy must strike a balance. While taxes are a primary source of revenue, excessive or inefficient taxation can stifle economic activity. Reviewing STT and dividend taxation can potentially optimize this balance, promoting growth without unduly compromising revenue. **Constitutional and Legal Framework:** Taxation in India is governed by constitutional provisions and specific Acts. **Article 265** of the Indian Constitution states that "No tax shall be levied or collected except by authority of law," meaning all taxes must be backed by legislation. The power to legislate on taxes related to income (including capital gains and dividends) falls under **Entry 82 of the Union List** (Schedule VII, Article 246), which grants the Parliament exclusive power to make laws with respect to "Taxes on income other than agricultural income." The **Income Tax Act, 1961**, and subsequent annual **Finance Acts** (which incorporate budget proposals) are the primary legal instruments governing these taxes. Any changes to STT or dividend taxation would be introduced through amendments to the Income Tax Act, 1961, and potentially the Securities Contracts (Regulation) Act, 1956. **Future Implications:** Somaiyaa's comments signal a potential area of reform for Budget 2026. The government will likely weigh the revenue implications against the benefits of enhancing market efficiency and investor appeal. If a review leads to a rationalization of STT or dividend taxation, it could lead to increased trading activity, higher foreign investment inflows, and better capital allocation. This could further solidify India's position as a global economic powerhouse, contributing to the nation's broader goals of economic stability and sustained growth. However, the government will need to carefully model the revenue impact, as both STT and income tax on dividends contribute significantly to the exchequer. The debate underscores the ongoing need for dynamic and responsive fiscal policies to support India's evolving economic landscape.