The basic idea about stamp duty and the obligations imposed under the Indian Stamp Act, 1899 ("Act") for interstate transactions has been illustrated in our previous blog. The concept of stamp duty was introduced by the Britishers in 1899 and was applicable for all property transactions. Stamp duty was to be deposited in the government treasury in accordance to the rates and procedure prescribed. The amount was collected by government-appointed stamp collectors which would be transferred to the concerned state under which the individuals are taxed.
The concept of stamp duty exists till date and it is a duty payable on certain specified instruments1 or documents. Stamps2 and the stamp papers are used in all commercial transactions. Stamp duty is paid on the prescribed instruments including conveyance or transfer of any movable or immovable property, such as transfer of shares or transfer of property on the instrument or document effecting the transfer of interest in any such property. The payment of stamp duty has been laid down in Section 33 while the rates of stamp duty payable for different types of documents are prescribed in Schedule I of the Act. The Act also highlights the provisions regarding levying, collection and payment of stamp duty.
LEVY ON INSTRUMENT
Stamp duty is a levy payable on instruments specified by statute on a fixed or on ad valorem basis. If the stamp duty is on ad valorem basis then the amount varies on the basis of value of the products, services or property on which it is levied. It is basically a levy on any transaction based on exchange of documents or execution of instruments.
Additionally, as per the Indian Contract Act,1872, an oral contract by which the parties intend to be bound is valid and enforceable.4 But there are certain circumstances in which the law demands that contracts be compulsorily written and registered (such as leases exceeding 11 months or a leave and licenses agreement). This is particularly relevant in the context of e-contracts where stamping of an e-contract poses many difficulties. (More information on this can be accessed here)
The stamp duty payable on documents varies across different states as levy of stamp duty is a state subject and it is governed by the provisions of the legislations enacted by that particular state. As India has adopted the federal structure, the Constitution of India has provided the States with the right to levy taxes on certain types of transaction as specified in Entry 44 of the Concurrent List. The proceeds of stamp duty leviable in any financial year are assigned to the state. State Governments prescribe by rule that stamps purchased in that particular state alone should be used for execution of an instrument. Hence, the provisions relating to the stamping of documents and the value of stamp papers required for a particular document are provided in the stamp act enacted by that particular state legislature and in the absence of such state legislation, the stamping is done in accordance to the Act.
Therefore, to summarize, stamp duty is a documentary impost and not a transaction tax. It is payable (i) prior to or at the time of execution of the document, or (ii) within three months of the executed document first being delivered and received in that part of India where either any conditions precedent or subsequent needs to be performed, and/or where the property to which the document relates is situated.
As specified in question 3 of our previous blog, there are various ways of paying the stamp duty. These modes were originated and were made stringent in their application after the famous Telgi scam5. Central government after this scam became vigilant and introduced certain change like the Indian Security Press now has to mandatorily number the stamp papers serially, inserting water marks in the stamp paper and the name of the state from where the stamp paper is being issued or distributed by the government should be printed on the stamp paper. Any delay or short payment on stamp duty attracts heavy penalty.
ESSENTIALS OF STAMPING AN INSTRUMENT
The essentials to be considered while stamping an instrument are as follows:
- The stamp paper should reflect the name of the company/individual who is a party to the instrument.
- An instrument cannot be stamped for an amount which is lower than the value as prescribed under the relevant legislation.
- The penalty applicable on an unstamped/under stamped instrument is computed on an ad valorem rate which varies from state to state and maximum penalty could range from twice the deficient stamp duty to ten times the deficient stamp duty. Further, deliberate evasion of stamp duty may also attract imprisonment.
- Appropriate stamping of an instrument provides it with an evidentiary value in a court of law.
- Examine whether the instrument is of a mixed nature.
MIXED NATURE OF AN INSTRUMENT
The substance of the instrument indicates the amount of stamp duty to be paid. The title of the document is not the true indicator of the value of stamp required. It is the content of the document which should be considered for ascertaining the stamp duty payable.
A contract of indemnity can be a sole contract and/or part of a larger general contract between the indemnifier and the indemnified. If a contract of indemnity is contained as a clause/article in a larger general contract, the same would also need to be stamped additionally for the indemnity. According to the Bombay Stamp Act, 1958 a contract of indemnity is stamped at Rs. 500/- (Rupees Five Hundred only). Therefore, the stamp duty applicable for the indemnity needs to be paid along with the stamp duty applicable for the larger general contract.
Moreover, in some states of India, if the agreement cover arbitration clause then the additional stamp duty needs to be paid for the same. For eg: Under the Karnataka Stamp Act, 1957, the stamp duty levied for arbitration clause is Rs. 200 which is to be stamped in addition to the general requirements.
Therefore, the contracting party is required to consider the entire nature of the instrument including the various mixed aspects of such instrument prior to calculation of the stamp duty.
RECENT CONTROVERSIES - MORTGAGE DOCUMENTS
Syndicated loans are quite common in lending transactions. In large loans, a single bank may not be in a position to provide the loan by itself. Hence, the loan is syndicated such that two or more banks agree to make loans to a borrower on common terms governed by a single agreement between all parties. Similarly, a common security trustee is appointed to receive and hold the security provided by the borrower, which is held for the benefit of the common lenders. The issue of stamp duty on the mortgage provided by a borrower to a security trustee for the benefit of syndicated lenders was cropped up in the case of Chief Controlling Revenue Authority v. Coastal Gujarat Power Ltd. and others6. The Hon'ble Supreme Court held that a mortgage deed with security trustee to secure loans of multiple banks would each be treated as a distinct transaction and would be liable for stamp duty as if separate mortgage deeds were recorded for each such bank / lender.
Before this landmark judgment, it was considered that the stamp duty shall be payable on the instruments and not on the transactions. The revenue authority had claimed that the combining of the mortgage transactions into one instrument was for the sole purpose of evading stamp duty, which is not entirely correct. This judgment is likely to have a widespread implication on various transactions carried out within the territory of India. We believe that the impact of this judgement, immediately has been seen in Maharashtra (which has identical laws as Gujarat for stamping) where lending transactions, particularly creation of charge is being kept on hold. The above judgment has deeply affected the business community and increased cost of finance manifold.
STAMPING ON ELECTRONIC CONTRACTS
Seeing the growth, prospects and boom of business in India, the transaction via electronic contracts have been on a constant rise. As the payment of stamp duty has gone online and e-stamp papers are available, it has become mandatory to levy stamp duty on e-contracts as well. The detailed process for payment of stamp duty has been st out in our previous blogpost E-contracts in India.
1. Section 2(14) of the Act: "Instrument" includes every document and record created or maintained in or by an electronic storage and retrieval device or media by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded.
2. Section 2 (26) of the Act: "Stamp" means any mark, seal or endorsement by any agency or person duly authorised by the State Government and includes an adhesive or impressed stamp, for the purpose of duty chargeable under this Act.
3. Section 3.3 of the Act: Instruments chargeable with duty – Subject to the provisions of this Act and the exemptions contained in Schedule I, the following instruments shall be chargeable with duty of the amount indicated in that Schedule as the proper duty therefore, respectively, that is to say—
- every instrument mentioned in that Schedule which, not having been previously executed by any person, is executed in India on or after the first day of July, 1899;
- every bill of exchange[payable otherwise than on demand] or promissory note drawn or made out of [India] on or after that day and accepted or paid, or presented for acceptance or payment, or endorsed, transferred or otherwise negotiated, in [India]; and
- every instrument (other than a bill exchange or promissory note) mentioned in that Schedule, which, not having been previously executed by any person, is executed out of India on or after that day relates to any property situate, or to any matter or thing done or to be done, in India and is received in India: Provided that no duty shall be chargeable in respect of—
- any instrument executed by, or on behalf of, or in favour of, the Government in cases where, but for this exemption, the Government would be liable to pay the duty chargeable in respect of such instrument;
- any instrument for the sale, transfer or other disposition, either absolutely or by way of mortgage or otherwise, of any ship or vessel, or any part, interest, share or property of or in any ship or vessel, registered under the Merchant Shipping Act, 1894, or under Act 19 of 1938, or the Indian Registration of Ships Act, 1841 (10 of 1841) as amended by subsequent Acts.
- any instrument executed, by, or, on behalf of, or, in favour of, the Developer, or Unit or in connection with the carrying out of purposes of the Special Economic Zone. Explanation.—For the purposes of this clause, the expressions "Developer", "Special Economic Zone" and "Unit" shall have meanings respectively assigned to them in clause (g), (za) and (zc) of section 2 of the Special Economic Zones Act, 2005.
4. Pullock and Mulla, Indian Contract Act and Specific Relief Act, 14th Edition, Volume 1, Page 233.
5. Stamp papers upto certain denominations are permitted to be sold by licenced stamp vendors in India. However, the procedure for obtaining and selling of stamp paper by these licenced stamp vendors was highly disorganized. The Indian Security Press did not maintain any record of serial numbers for the stamp papers nor was there any stipulation that required the name of the destination be printed on the stamp paper. This made it possible for the operators to print stamps and supply the same at their discretion. Abdul Karim Telgi used this lacuna in the system and masterminded the Telgi scam which involved the counterfeiting of the stamp papers and the disappearance of original stamp papers.
6. Chief Controlling Revenue Authority v. Coastal Gujarat Power Ltd , Civil Appeal No. 6054 of 2015 arising out of S.L.P. (C) No. 32319 of 2013.
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.