In this blog post, Saurodeep Dutta, a student of University of Calcutta, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes about the importance of stamp duty levied on legal documents during investment transactions and further goes on to write about the provisions under the Delhi Stamp Act.
Preliminary
Stamp Duty is a tax that is levied on documents, especially legal documentation. Historically, it included a majority of transactions including cheques, receipts, military commissions, marriage licenses and land transactions. Issuance of documents with actual physical stamps was common in earlier times, but that has changed in recent times with most documents not requiring physical stamps anymore.
The importance of stamp duty when it comes to investments arises because paying stamp duty grants legal documents recognition, turning it into a document which can be used in case of any litigation that arises out of the investment, assisting an investor in securing his investment.
It is worth noting here that there are different duties on various documents in different States. Each state has its authority in the collection of stamp duty and thus varying it in different states. The power to levy Stamp Duty is, however, divided between the Union and the States. The Central Government levies stamp duty on the instruments specified under Article 246 of the Constitution, read with Schedule VII, List I, Entry 91. The State Governments levy stamp duty on the instruments specified under Article 246 of the Constitution read with Schedule VII List II, Entry 63.
Levy of stamp duty
Stamp duty is levied on documents in accordance with Schedule 1 of the Indian Stamps Act, 1899. The Indian Stamp Act, 1899 is a Central enactment and States have powers to adopt the Indian Stamp Act, 1899 with amendments to the same to suit the transactions peculiar to each State. Section 3 of the Indian Stamp Act, 1899 is the charging Section and stipulates that stamp duty has to be paid on the instruments provided in Schedule I to the Indian Stamp Act, 1899. Certain States have introduced Schedule IA to the Indian Stamp Act, 1899 being the stamp duty payable in that State.[1] Delhi has the Indian Stamp (Delhi Amendment) Act, 2007 along with the original pan-India legislation.
Transferability of shares and stamp duty
A share is regarded as a movable property, as has been laid out in Section 44 of the Companies Act, 2013. A share of a company is transferable according to the rules laid out for the same in the concerned Company’s Articles of Association. For the transfer of a share to take place, the current holder of the share must make a deed of transfer of the share in favour of the incumbent holder, and the proper transfer of a share requires the transfer deed to be duly executed and stamped in accordance with the Stamp Act provisions, in order for it to constitute a proper transfer of shares.
Issuance of shares and stamp duty
A Company’s issuance of shares is a practice that is undertaken to raise capital for the particular Company. Every such issue of share to a shareholder requires the Company to issue a share certificate to the holder, certifying the person to be the holder of the shares. This is a statutory function required under Section 44 of the Companies Act. In this stead, Section 3 of the Indian Stamps Act requires every valid share certificate to be duly stamped. The Company issuing this share must pay the stamp duty within 30 days of the issue of the certificate.
Provisions under the Delhi Stamp Act
For any investment relating to the issue and transfer of shares in Delhi, the provisions of the Delhi Stamp Act (“the Act”) will be activated. This can be discussed under two headers.
Issuance of shares
Under the terms of the Act, Stamp rates are payable for any certificate or other document evidencing the right or title of the holder thereof, or any other person, either to any shares, one thousand stock in or of any incorporated Company or other body corporate or to become proprietor of shares, script or stock in or of any such Company or body.
The rate of stamp duty has also been specified under the Act. Stamp duty will be levied at Rupees one for every one thousand or part thereof of the value of the share, script or stock, including the premium.
Transfer of shares
For transfer of shares, the stamp duty applicable is 0.25% of the market value of the share[2]. An important point to note here is that the duty is applicable on the market value of the share and not on the nominal value. Any calculation of stamp duty has to be made in accordance with the market value of the share at that particular time, and not on the nominal value.
Section 29 of the Act requires the costs of the stamp to be borne by both parties involved in the transfer transaction, in the absence of any agreement between the two. However, in the case of Union of India vs. Kulu Valley Transport Ltd,[3]it was held that in the case of stamp duty arising out of the transfer of shares, the seller would be responsible for the payment of stamp duty. Section 17 of the Indian Stamp Act requires the payment of stamp duty before the registration of the certificate of transfer of shares.
Following the establishment of the Depositories Act and the emergence of trading in dematerialised form, stamp duty is payable only on the physical transfer of shares. Demat trading does not qualify for Stamp Duty; provided issuer pays stamp duty on the consolidated total number of securities.
Conclusion
Stamp duty is an important part of the revenue of the Government, and payment of stamp duty is necessarily required. Non-payment of stamp duty and underpayment of stamp duty often leads to charges. It is thus important to pay stamp duties as and when required.
Payment of stamp duty has the added benefit of making investments in Companies by way of shares much more secure, lending them the ability to be used in courts of law in litigation.
Footnotes:
[1]http://taxguru.in/finance/levy-of-stamp-duty-in-India-types-of-stamp-in-India-important-provisions-of-stamp-duty.html
[2] Article 62, Schedule 1 of the Act
[3] 28 Comp. Cas. 29 (1958)
