Stamp Duty and amendments to the Indian Stamp Act, 1899 1

Introduction

Stamp duty is an ad valorem tax payable on the value of an instrument used for various transactions- commercial or otherwise. The Indian Stamp Act, 1899 ("Act") enacted to prescribe and provide for the collection of proper stamp duty on an instrument is based on the chargeability of instrument and not of the transactions, notwithstanding the fact that different instruments may pertain to a single transaction.2

Under the Indian Constitution, while the responsibility of fixing of the stamp duty is divided between the Union Government and the State Governments, its collection is vested with the State Government in which the instrument is executed. The amounts so collected are retained by the State Governments.3

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

(ii) provide for a centralized collection mechanism under which the stamp duty is to be collected at one place by one agency (i.e. through the stock exchanges or clearing corporations authorized by the stock exchange or by the depositories) on one instrument.4

This article seeks to analyze the key changes brought in by the Amendment.

Existing stamping regime and key amendments

Expanded definition of securities

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

Removal of exemption of stamp duty on issue/transfer of dematerialized securities

The Act exempted transfer of securities in dematerialized form from the stamp duty6, 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

Stamp duty on stock-exchange based transaction

The Amendment introduces a new definition of clearance list which is each client's list of transactions of sale and purchase relating to contracts traded on the stock exchange. Following the Amendment, this clearance list will be deemed to be the principal instrument on which the stamp duty shall be payable and no additional stamp duty shall be charged on the any other instruments in relation to the same sale or purchase of securities on the stock-exchange.9 Further, it has been clarified that stamp duty shall be payable on each sale or purchase of securities, whether delivery based or otherwise, through a stock exchange which are listed in the clearance list.10 Such stamp duty will be paid by the buyer on the market value11 of such securities at the time of the settlement of transaction of securities of such buyer.

This imposition based on the clearance list will increase the transaction costs of proprietary trading where brokers trade for direct gain instead of trading on behalf of a client, as under the Act, the stamp duty is levied only on the note or memorandum sent by the broker or the agent to its client intimating the purchase or sale of securities on account of such client ("Broker Turnover Stamp Duty").12 However, in the case of proprietary trading, there is no exchange of note or memorandum resulting in ambiguity regarding whether Broker Turnover Stamp Duty applies in case of proprietary trading. These increased transaction costs may well lead to decline in jobbing and arbitraging where the spreads are generally very thin.

Stamp duty on depository-based transaction

In the case of depository-based transaction, the Amendment introduces the concept of allotment list, which is a list containing details of the allotment of securities intimated by the issuer to the depository. Following the Amendment, this allotment list will be deemed to be the principal instrument on which the stamp-duty shall be payable and no stamp duty shall be charged on any other instruments in relation to the same sale or purchase of securities.13 The depository is required to collect the stamp duty on behalf of the State Government from the issuer of securities, before executing any transaction in the depository system. The stamp duty is levied on the total market value of the securities as listed in the allotment list.14In the specific case of an open offer or offer for sale or private placement conducted through a depository, stamp duty shall be collected from the offeror, on the market value of the security being acquired or sold out, at the offer price, once the offer is successfully completed.15

As discussed above, the transfer of securities within the depository system is exempted from stamp duty under the present regime. However, the Amendment not only removes this exemption but also lays down the manner in which the stamp duty is to be levied and collected on the transfer of securities. Such stamp duty shall be collected on behalf of the State Government by the depository from the transferor of the securities on the consideration amount specified by the transferor in the delivery instruction slip16 before execution of all off-market transfers involving transfer of securities in the depository system.17

Stamp duty on the physical transfer of securities

As per the Amendment, any issue, sale or transfer of securities other than through stock exchange or depository shall be collected from the issuer or the transferor on the total market value of the securities so issued or on the consideration amount specified in the instrument effecting the transfer.18

Valuation of securities

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.

Revised Stamp Duty Rates

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

0.005%

Transfer or re-issuance of debentures

0.0001%

Issue of security other than debenture

0.005%

Transfer of security other than debenture on delivery basis

0.015%

Transfer of security other than debenture on non-delivery basis

0.003%

Futures derivates (equity and commodity)

0.002%

Options derivatives

0.003%

Currency and interest rate derivatives

0.001%

Other derivatives

0.002%

Government Securities

0%

Repo on corporate bonds

0.00001%

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.

The Amendment also subjects all debentures to stamp duty unlike the Act21 which required only marketable securities to be stamped.22 This would increase the transaction cost of issue of unlisted debentures by private companies.

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.

Penalties

The Amendment has introduced a new penalty provision to ensure that collection and transfer of stamp duty is done in a timely manner. It provides that if any person required to collect the stamp duty, fails to collect the stamp duty or fails to transfer the stamp duty so collected within 15 days of the expiry of the time specified, it shall be punishable with fine which shall not be less than INR 1,00,000, but which may extend up to 1% of the collection or transfer so defaulted.23

Streamlining of the stamp duty

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.

Analysis of impact of the Amendment

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.

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.

4 Press Information Bureau, Amendments to the Indian Stamp Act, 1899 for Rationalization of Stamp Duty & Design of Zero Evasion Collection Mechanism in Respect of Securities market instruments, (Jan. 31, 2020, 11:05 A.M.), https://pib.gov.in/newsite/PrintRelease.aspx?relid=18884.

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.

15 Rule 6 (4) of the Rules.

16 Section 9(A) (2) of the amended Indian Stamp Act, 1899 read with Rule 5 (2) of the Rules.

17 Rule 5 (1) 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.