The Finance Act 2019 amends the Indian Stamp Act, 1899. (Amended Stamp Act). The amendments are set to come into force from 1 April 2020. Pursuant to the Amended Stamp Act, the Indian Stamp (Collection of Stamp Duty through Stock Exchanges, Clearing Corporations, and Depositories) Rules 2019 (Rules) have been enacted. The Rules are also set to come into force from 1 April 2020.
This update highlights the key provisions of the Amended Stamp Act and the Rules.
The Amended Stamp Act relates to the levy of stamp duty on securities. The Amended Stamp Act aims to clarify and streamline the process for the payment of stamp duty on securities.
The Rules have been introduced as a guidance note for the stock exchanges and the depositories for collection of stamp duty, determination of transactions (whether on delivery basis or not), transfer of duty to respective states, filing of returns, etc.
In addition, the Rules also provide clarity on the modalities of payment of stamp duty for transactions involving issue/transfer of shares in dematerialized form.
Key reforms of the Amended Stamp Act and the Rules
- Definitions: the Amended Stamp Act amends the existing definitions to align them with the definitions provided under other statutes. The Amended Stamp Act also introduces some new definitions such as "debenture", "market value" and "securities". The new definition of "securities" is extensive and has the net effect of extending the list of instruments liable to stamp duty.
- Dispensation of exemption to transfer of securities: under the erstwhile regime, transfer of securities in physical form was subject to the payment of stamp duty and transfer of securities in dematerialized form was exempted. This exemption has been done away with, and stamp duty is now payable on transfer of securities (with consideration) in dematerialised form.
- Similarly, the transfer of units of a Mutual Fund including units of the Unit Trust of India, that are dealt by a depository, were previously exempted from stamp duty. This exemption has been removed.
- Stamp Duty on principal instrument only: a single transaction through the stock exchange or depository often involves the execution of several instruments (e.g., notes, memorandums, etc.). To avoid multiplicity of payments of stamp duty on such transactions, the Amended Stamp Act provides that stamp duty is payable only on the principal instrument. The principal instrument for different transactions is specified in the Amended Stamp Act. The Amended Stamp Act clarifies that no stamp duty shall be charged on any instrument (other than the principal instrument) on a single transaction.
- Onus of payment of stamp duty: the Amended Stamp Act specifies the persons liable to pay stamp duty in different transactions. The table below summarizes the newly introduced provisions in this regard:
Nature of transaction
Sale of security through stock exchange
Sale of security otherwise than through stock exchange
Transfer of security through depository
Transfer of security otherwise than through a stock exchange or depository
Issue of security (whether through a stock exchange or a depository or otherwise)
In case of any other instrument not specified in Section 29 of the Indian Stamp Act, 1899
By the person making, drawing or executing such instrument
Revised Stamp Rates: Prior to the introduction of the Amended Stamp Act, stamp duty was payable at a flat rate of 0.25% of the consideration on a transfer of shares. There was no stamp duty prescribed on the issue of shares (apart from the share certificate issued to the shareholder). The Amended Stamp Act specifies the following rates of stamp duty for different kinds of transactions involving securities:
Issuance of debentures
Transfer or re-issuance of debentures
Securities other than debentures
Issuance of securities
Transfer of securities on delivery basis
Transfer of securities on non-delivery basis
Futures (equity and commodity)
Options (equity and commodity)
Currency and interest rate derivatives
Repo on corporate bonds
- Mechanism for collection of stamp duty: The Amended Stamp Act and the Rules provide for the mechanism for collection of stamp duty for different transactions as follows:
- Stamp duty viz.-à-viz. sale of listed securities made through stock exchanges
- Date of collection of stamp duty: the stamp duty in respect of sale of listed securities through the stock exchange will be collected on the settlement day.
- Stamp duty on consideration: Where a transaction in securities is reported to a stock exchange, the stamp-duty will be collected on the entire sale consideration when the transfer is reported, even if the consideration is paid in part or in instalments to be paid in future.
- Stamp duty on tender offer, open offer, private placements, etc.: where a transaction arises from tender offer, open offer or offer for sale or private placements through stock exchange, the stamp-duty will 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.
- Stamp duty viz.-a-viz. transfer of securities in the depository system
- Date of collection of stamp duty: the stamp duty in respect of transfer of securities in the depository system will be collected before the execution of all off-market transfers.
- Stamp duty on consideration: The stamp duty will be collected on the consideration amount specified by the transferor in the delivery instruction slip. The consideration reported to the depository will be considered as the actual consideration amount.
- Stamp duty on pledge of securities: the stamp duty will be collected from a pledgee on the market value of securities, at the time of transfer of securities pursuant to invocation of pledge.
- Stamp duty viz.-à-viz. creation of a new security and change in records in the depository upon the issue of securities:
- Date of collection of stamp duty: the stamp duty in respect of creation of new security and change in records in the depository upon issue of securities will be collected from the issuer prior to executing any transaction in the depository system.
- Stamp duty on total market value: the stamp duty is payable on the total market value of the securities contained in the allotment list.
- No stamp duty on creation or destruction of securities: stamp duty in respect of creation or destruction of securities on account of corporate actions such as stock split, stock consolidation, mergers and acquisitions, or such similar actions, etc. will not be collected by the depository to the extent that it does not involve a change in beneficial ownership. However, a fresh issue to an investor as part of a corporate action will be subject to stamp-duty.
- Stamp duty on tender offer, open offer, private placements, etc.: in case of transactions arising from tender offer or 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.
The Amended Stamp Act and the Rules address the payment of stamp duty on securities — they bring about clarity with respect to modalities and obligations in relation to payment of stamp duty, and the responsibility of the stock exchanges and depositories for collection of duty, while effecting the enlisted transactions.
Additionally, the Rules also provide for the duty of the collecting agents, that is, the stock exchanges and the depositories to transfer the duty collected to the relevant state governments (basis the domicile of the transacting parties) and submit monthly returns in respect of the duty so collected.
Having said the above, uncertainty on certain aspects remains. For example, stamp duty on issuance of shares is not a subject matter for the central government to legislate on. The reactions of states to the imposition of stamp duty on issuance of shares is awaited. Further, with the removal of the exemption of stamp duty on transfer of shares in dematerialized form, transaction costs are likely to increase.
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.