Securities transaction tax (STT) collections dipped 12.9% during the April to November 2012 period, as weak investor sentiments over the past several months resulted in a dip in trading volumes.

The Income-tax department collected Rs 2,905 crore in STT during the period, compared with Rs 3,335 crore collected during the corresponding period last fiscal.

Collection of STT, which is paid by both buyers and sellers of equities, has been on the decline since last year. The fall in STT collection was largely due to low trading volumes, a fallout of the general slackness in the economy and weak market sentiment.

STT collection dropped sharply during 2011-12, falling short of the year's target of Rs 7,500 crore by Rs 1,500 crore, or 20%.

The current fiscal's target for STT collection is below Rs 6,000 crore. A senior income-tax official said, "Unless the market sentiments change significantly in the remaining months of the fiscal, we will fall short of the target for STT collection."

Going by the trend so far, STT collection for the current fiscal has been below the actual collection last fiscal. This is the second successive year that STT collection has fallen short of the previous year's collection.

The decision of the government to reduce tax on delivery-based trades to 0.1% from 0.125% earlier also is considered a reason for the fall in STT collection.

The measure proposed in this year's Budget took effect on July 1. Delivery volumes, which have a higher STT, declined whereas trading in options, which have a low STT, rose sharply, market experts observed.

Deven Choksey, Managing Director of KR Choksey Shares & Securities, told ET, "Options trading in the derivatives market attracted more than 90% volumes while delivery-based volumes remained as low as 2-3% in the current financial year. Lower delivery-based volumes would have adversely impacted STT collection recorded by the bourses." Most of the foreign ETFs largely participated in options trading, thereby contributing significantly to the spurt in volumes in this segment, he added.

STT was introduced in 2004-05 as a tax on securities transactions at the rate of 0.125%. Both buyers and sellers of securities have to pay the tax.

By introducing STT, the government was seeking to offset the revenue shortfall arising from the withdrawal of long-term capital gains tax and the reduction of tax on short-term capital gains to 10% from 30%.