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Stamp duty is an ad valorem tax payable on the value of an instrument used for various transactions- commercial or otherwise.
India Corporate/Commercial Law
Recently, the Union Government notified Part I of Chapter IV of the Finance Act, 2019 ("Amendment") and promulgated the Indian Stamp (Collection of Stamp- Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 ("Rules") which will come into effect from 01 April 2020. The Amendment seeks to:
(i) address the stamp duty regime recognising the technological changes in the field of financial securities, which today are primarily, done electronically through the stock exchange or through authorized clearing corporations and the depositories; and
This article seeks to analyze the key changes brought in by the Amendment.
The Amendment has introduced an inclusive definition of securities and expanded the scope of securities that have to be stamped under the Act. It does not only include securities as defined in Securities Contracts (Regulation) Act, 1956 but also include derivatives, certificate of deposit, commercial paper, repo on corporate bonds and other debt instruments as the Reserve Bank of India may specify and other instruments which the Central Government may notify. 5
The Act exempted transfer of securities in dematerialized form from the stamp duty 6 , however, the Amendment removes this exemption. 7 Hence, now transfer of dematerialized securities, in addition to securities transaction tax ("STT") will also attract the additional cost of stamp duty, thereby increasing the transaction costs. For instance, transfer of shares through a stock-exchange on a delivery basis will now in addition to the STT of 0.1% on the price, also be subjected to stamp duty at the rate of 0.015% on the price of the shares transferred.
However, the transfer of registered ownership of securities from a person to a depository (i.e., conversion of physical or materialized securities to dematerialized securities) or from a depository to a beneficial owner (conversion of dematerialized securities to physical or materialized securities) shall continue to be exempted. 8
Under the Act, the stamp duty is calculated on the value of the security according to the average price or the value thereof as on the date of the instrument. 19 But, under the Amendment, the stamp duty shall be calculated on the market value of the security. This will ensure that in case of listed securities, the stamp duty is levied on the exact price on which it is transacted and not on the average price of the day.
Under the Act, the stamp duty rates are:
Instrument
Rate of Stamp Duty
Debentures (being a marketable security)
0.05% per year of the face value of the debenture, subject to the maximum of 0.25% or INR 25,00,000 whichever is lower.
Transfer of shares
0.25% of the value of the share.
The revised stamp duty rates under the Amendment are:
Instruments
Rate of Stamp Duty
Issuance of debenture
Transfer or re-issuance of debentures
Issue of security other than debenture
Transfer of security other than debenture on delivery basis
Transfer of security other than debenture on non-delivery basis
Futures derivates (equity and commodity)
Currency and interest rate derivatives
Repo on corporate bonds
Under the scheme of the Indian Constitution, Entry 91 of List-I of the seventh Schedule allocates the legislative power to fix stamp duty on the "issue of shares" and the "transfer of shares" between the State Governments and the Union Government, respectively. 20 However, the above list indicates that the Union Government has prescribed rates for the "issue of security other than debenture", i.e., "issue of shares". Since such an exercise of legislative power is beyond the constitutionally recognized principles of federalism, it may make the Union Government's actions susceptible to constitutional challenge.
Collection of stamp-duty
The Amendment introduces Section 9A (and when read with the Rules), it prescribes the responsible parties from whom the stamp duty shall be collected.
For instance, the stamp-duty shall be collected (a) from the buyer in the case of sale of securities through stock-exchange; (b) from the seller in the case of sale of security otherwise than through a stock-exchange or depository; (c) from the transferor in the case of transfer of security through a depository. However, the Amendment does not alter the enabling provision under Section 29 of the Act that allows parties to a transaction to agree to allocate the cost as per their commercial arrangement.
Under the Act, various States prescribed multiple rates on same instrument leading to "rate shopping". For instance, a company registered in Mumbai would find it cost-efficient to issue its shares in Noida (in Uttar Pradesh) as the stamp-duty on share-certificates in Noida is a mere 0.00001% of the value of the share than the stamp duty on the share certificate in Mumbai which is 0.1% of the value of the shares. This difference led to "rate shopping" being rampant and the resulting loss to the exchequer. The Amendment seeks to conclusively remove any perverse incentives for "rate shopping" by prescribing a lower, but uniform rate that is universally applicable across the country. Additionally, the overall lowering of the rates will also encourage companies to issue shares in States in which their registered offices are located.
Under the present regime of levy and collection, one of the major concerns were the multiple demands for stamp duty raised by different State Governments on the same instrument. To prevent this, the Amendment has provided for a uniform process by which the stamp duty is to be levied, collected and retained by the respective State Governments. The Amendment provides that the stock exchange (or a clearing corporation authorised by it) or the depository, as the case may be, shall, within three weeks of the end of each month transfer the stamp duty to the State Government where the residence of the buyer is located and in case the buyer is located outside India, to the State Government having the registered office of the trading member or broker of such buyer and in cases where there is no such trading member of the buyer, to the State Government having the registered office of the depository participant (as defined in clause (g) of section 2 of the Depositories Act, 1996) 24 .
The Amendment marks a very significant change in the manner in which stamp duty is levied and collected in relation to the issue, sale or transfer of securities. While on one hand the Amendment aims to encourage compliance and eliminate incentives for rate shopping by prescribing lower and uniform rates for each instrument across the country, it must be noted that parts of the Amendment may be challenged as being ultra-vires the constitutional scheme of division of legislative authority. It introduces the concept of a principal instrument such as "allotment list" and "clearance list" on which the stamp duty shall be payable. It clarifies that no stamp duty shall be charged on any other instruments other than the principal instruments. This could go a long way in eliminating multiple incidence of stamp-duty. It further clarifies the persons (issuer/buyer/ seller/ transferor) from whom the levy of stamp-duty shall be collected. Overall, the changes proposed in the Amendment would certainly contribute to ease of doing business in India.
Corrigendum - Please note that the Ministry of Finance, India has issued two notifications dated March 30, 2020 deferring the implementation of relevant amendments to the 'Indian Stamp Act, 1899 and corresponding enforcement of the 'Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019' to July 1, 2020. Earlier, as mentioned in the article, the proposed timeline for implementation was April 1, 2020.
Footnotes
1 Authors: Shinoj Koshy is a Partner and Mayank Labh is an Associate at L&L Partners. The views expressed are personal and do not constitute legal advice.
2 Chief Controlling Revenue Authority v. M/s Reliance Industries Limited, Civil Reference No. 1 of 2007 in Writ Petition No. 1293 of 2007 in Reference Application No. 8 of 2005.
3 Article 268 of the Indian Constitution read with Schedule 7 to the Indian Constitution.
5 Section 2(23A) of the amended Indian Stamp Act, 1899.
6 Section 8A of the existing Indian Stamp Act, 1899.
7 Section 9A of the amended Indian Stamp Act, 1899.
8 Section 8A (b) of the amended Indian Stamp Act, 1899.
9 Section 9A (1) (a) of the amended Indian Stamp Act, 1899 read with Section 4(3) of the amended Indian Stamp Act, 1899.
10 Section 9A (1) (a) of the amended Indian Stamp Act, 1899.
11The term market value, under the Amendment, in relation to an instrument through which
(a) any security is traded in a stock exchange means the price at which it is so traded; (b) any security which is transferred through a depository but not traded in the stock exchange means the price or the consideration mentioned in such instrument; and (c) any security is dealt otherwise than in the stock exchange or depository, means the price or consideration mentioned in such instrument.
12 Article 43 of Schedule 1 to the existing Indian Stamp Act, 1899.
13 Section 9A (1) (b) of the amended Indian Stamp Act, 1899 read with Section 4(3) of the amended Indian Stamp Act, 1899.
14 Section 9A (1) (b) of the amended Indian Stamp Act, 1899.
16 Section 9(A) (2) of the amended Indian Stamp Act, 1899 read with Rule 5 (2) of the Rules.
18 Section 9B of the amended Indian Stamp Act, 1899.
19 Section 21 of the existing Indian Stamp Act, 1899.
20 Entry 91of List-I of the Seventh Schedule to the Indian Constitution. The said entry specifies that the Union Government could specify the rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts.
21 Section 2(10) (A) of the amended Indian Stamp Act, 1899 read with Article 27 of Schedule 1to the amended Indian Stamp Act, 1899.
22 Article 27 of Schedule 1 to the existing Indian Stamp Act, 1899.
23 Section 62A of the amended Indian Stamp Act, 1899.
24 See 9A (4) of the amended Indian Stamp Act, 1899.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
