The Central Board of Direct Tax is looking into non-payment of securities and transaction tax (STT) with regard to participatory-note (P-note) transactions.

Officials from foreign brokerage house and stock exchange were summoned by a CBDT member, who has asked them to provide details of transactions for the past few years where P-note deals were involved and the STT paid on the same.

Over 1500 verification notices were served to foreign brokerages and stock exchanges in 2011 for tax under recoveries related to P-note transactions that appeared like day trade. The STT under recoveries run into several thousands of crores as the tax was paid on intra-day trades even while the transactions were delivery based, sources within the CBDT probing the matter said.

STT is paid for trades where stocks are delivered to the buyer as well as for intra-day transactions where the buyer and seller square up positions before the closing hour. But the STT on latter transactions is lower. The income tax department has questioned the P-note deals that appear like day trades.

The IT department has found that there were discrepancies in STT collected by brokers from their clients and the same deposited by the exchanges to the department. P-note transactions in domestic stock markets were at its peak between 2006 to 2008 when they formed more than 50% of FII holding in India. IT department has often found it difficult to assess P-notes as they are offshore derivative instruments. After P-notes were partially banned in 2008, FII holding through this instrument fell to around 20% till 2010.