The key amendments that the Finance Act, 2019 proposes to the Indian Stamp Act, 1899 have been examined in Decoding the Amendment to the Indian Stamp Act, 1899 for Debentures – Part I. The impact of the amendments on debentures have also been analysed against the prevailing stamping arrangement for debentures.
This second part deals with the interplay between the definitions of 'debentures' and 'securities' under the Amendment, and issues relating to the implementation of the Centralised Collection Mechanism (CCM).
Do all Debentures Qualify as 'Securities' for the Purposes of the Amendment?
This question is relevant for the following reasons:
- The CCM is available to 'securities' dealt with on a stock exchange or depository.
- Once stamp duty on eligible securities is collected by a stock exchange or a depository, stamp duty on all secondary instruments relating to such securities is exempt.
Under the Amendment, the definition of 'securities' directs us to the definition under the Securities Contract (Regulation) Act, 1956 (SCRA), which in turn defines securities to 'include' shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature.
It is unclear whether debentures issued by companies to which the SCRA would not apply, should come within the definition of securities for the purposes of the CCM (say debentures issued by private companies). The objective of the Amendment refers to 'securities market instruments', which is generally understood to be in the context of public markets.1
It is interesting that the Amendment seeks to include a definition for the term 'securities' in addition to the term 'marketable security'. So, one can contend that 'securities' ought to be wider than 'marketable security' to read them harmoniously. Therefore, the term 'securities' should include instruments that are 'marketable securities' as also other instruments.
As things stand, there is no indication on whether the inclusive definition used in the Amendment is to be read wider than the definition in SCRA, which is also an inclusive definition!
How Will the CCM Work for Debentures?
|Sl. No.||Transaction||What is liable to stamp duty?||Who will pay?||Who will collect?||What is stamp duty calculated on?|
|1.||Sale of securities through a stock exchange||Sale (as in the clearance list2)||Buyer||Stock Exchange or Clearing Corporation||Market value of such securities at the time of settlement|
|2.||Transfer of securities for consideration, made by a depository (not being covered under Sl. No. 1)||Transfer||Transferor||Depository||Consideration amount|
|3.||Creation or change in the records of a depository pursuant to an issue of securities||Allotment List||Issuer||Depository||Total market value of securities contained in the allotment list|
As is evident from the table, as regards sale and transfer of securities, the Amendment seeks to collect stamp duty on the transaction of sale or transfer itself rather than the instruments involved in the transaction. The corresponding entries in the Schedule to the Act are also amended so as to levy stamp duty on the transaction itself3. On the other hand, as regards an issuance of securities, while the entries in the schedule levy stamp duty on the issuance itself, the CCM seems to be limited to collecting stamp duty payable on the allotment list.
If we analyse the table in the context of debentures, the following observations are relevant:
- Debentures are liable to stamp duty under Article 27. If these debentures are eligible securities, then would stamp duty payable on issue of debentures be collected through the CCM?
- Not every issue of debentures needs to have a letter of allotment. If there is a letter of allotment issued for debentures (and these debentures are eligible securities) and appropriate stamp duty is paid on the letter of allotment, then in light of the new Section 4(3), which exempts stamp duty on secondary instruments, would such debentures be exempt from stamp duty?
- The Amendment does not provide a definition or any other indication of what the term 'allotment list' seeks to cover. It is unclear whether stamp duty payable on 'allotment list' should be read to include the stamp duty payable on the debentures per se. Unless this is so, the objective of the Amendment to bring about ease and stability may not be achieved.
Stamp Duty – Who Decides?
Matters relating to stamp duty appear in all three lists (the Union list, the State list and the Concurrent list) under Schedule 7 of the Constitution of India.
The Union List contains rates of stamp duty applicable to debentures.
The State List contains rates of stamp duty for all instruments (other than those listed in the Union list).
Stamp duty (other than rates of stamp duty) features in the concurrent list, thereby giving the Centre and the State legislatures simultaneous power to legislate on the subject.
While the ability of the Centre to legislate on the matters on which it has is subject to interpretation of the entries in the lists, it can be strongly argued that the Amendment seeks to cover aspects that fall within the exclusive scope of the State legislatures (say rates of stamp duty applicable on issue of shares and transfer of debentures). This is further evident from the fact that the rules for the implementation of the CCM are to be made by the Central Government in consultation with the State Government4. The Centre also proposes to set up a coordination council comprising representatives from the Centre and the States to make recommendations for the review and revision of stamp duty rates5.
Stamp duty is a significant contributor of revenue to the State Governments. While some in the market may consider the Amendment as a welcome change for investors and issuers, in the way it brings stability and ease in dealing with securities, it must be noted that the Amendment takes away the autonomy of the State Governments on certain aspects. Needless to say, consent and cooperation from State Governments is going to be crucial for this Amendment to be implemented effectively and to achieve its intended objectives.
1 Press release dated February 21, 2019 on the Amendments to the Indian Stamp Act, 1899 for Rationalization of Stamp Duty & Design of Zero Evasion Collection Mechanism in Respect of Securities Market Instruments.
2 The Amendment defines a clearance list to mean a list of transactions of sale and purchase relating to contracts traded on the stock exchanges submitted to a clearing corporation in accordance with applicable law.
3 Under the revised Article 27 (applicable to Debentures), stamp duty is payable on issue, transfer and re-issue. Under the proposed Article 56A (applicable to Security other than Debentures), stamp duty is payable on issue and transfer of securities.
4 See proposed Section 9A (4) of the Act.
5 Press release dated February 21, 2019 on the Amendments to the Indian Stamp Act, 1899 for Rationalization of Stamp Duty & Design of Zero Evasion Collection Mechanism in Respect of Securities Market Instruments.