Collections by way of the Securities Transaction Tax (STT), the tax levied on buying and selling of securities, from Mumbai dipped by around 22%, according to Central Board of Direct Taxes (CBDT) sources. Mumbai accounts for nearly all of Indias STT collections.

The STT collections between April and May 25 this year stand at Rs 800 crore, while the figure for the corresponding period of the past fiscal was Rs 1,026 crore. Out of the total, all India direct tax collections of Rs 3,40,000 crore last year, STT accounted for about Rs 5,500 crore.

The current plunge in collections, market observers said, is understandable in view of the steep dip in the Sensex since the beginning of 2009. Between April and May last year, the Sensex was in the range of 15,000-16,000 points and crossed the 20,000-mark, before its fall in the middle of January this year.

Motilal Oswal, CMD, Motilal Oswal Securities, told ET: The arbitrage activities, too, have come down and the stock market is also down this year. It is, therefore, understandable that the STT collections went down during this period.

Since STT is a tax levied on buying and selling of securities, the market movement would have a bearing on the STT collection. However, tax authorities are optimistic of a better STT collection this year and are banking on the Sensex rising in the coming months.

STT, introduced in 2004, has been among the factors that helped boost the direct tax collections ever since it was introduced. The objective of introducing STT was to circumvent the tax evasion/avoidance of capital gains tax arising from the profit generated from investment in stocks. STT cannot be avoided because the tax is deducted at source.