This article is written by Utkarsh Tiwari, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com. Here he discusses “What is the Centralized Collection Mechanism and how does this impact Stamp Duty?”.   

Introduction

The Stamp Duty collection mechanism with respect to the securities defined in Section 2(h) of Securities Contracts (Regulation) Act, 1956 such as shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; was a confused mechanism until the Amendment Act of 2019 of the Stamp Duty Act, 1899 proposed by Finance Act, 2019. The collection mechanism as proposed is a centralized mechanism adopted by such amendment. 

As per the Section 9A sub-section (1) of the Amendment Act of 2019 of the Stamp Duty Act, 1899, only the Stock Exchanges, Clearing corporations authorized by stock exchange and Depositories will be liable to impose and collect the stamp duty when any of securities is being sold, transferred or issued through them, on behalf of State Government. Moreover, it has also clearly mentioned that no stamp-duty shall be charged or collected by the State Government associated with the transactions mentioned in sub-section (1). Therefore, through the orchestration of such centralized mechanism, the Union has entered and breached the Sate list and its power to legislate on it by providing a uniform stamp duty rates in the Schedule I of the Stamp Duty Amendment Act, 2019. This is the Centralized Collection Mechanism introduced by the Finance Act, 2019 aiming towards streamlining the collection mechanism throughout the nation, and minimal tax evasion. 

In this article, the central collection mechanism for number of securities as mentioned above will be discussed and it is streamlining along with various new express provisions clearing the air on number of confusions such as who will pay the stamp duty, at what rate, basis of levying of stamp duty, place of paying stamp duty, etc. and the critical analysis of the amendment as whole. The Central Government (Ministry of Finance) has in its notification dated 10th December 2019 appointed 9th January 2020 as the date on which these provisions comes into force.

I. Transactions involved under the Centralized Collection Mechanism

The Finance Act, 2019 is making a notable transformation in levying and collection of Stamp duty on the securities mentioned under Section 2(h) of Securities Contracts (Regulation) Act, 1956. The Act involves the following transactions falling under its ambit:

1. Sale of Securities through a Stock Exchange.
2. Transfer of Securities for consideration, made by a depository 
3. Creation in the records of depository pursuant to an issue of securities.

The power of Central Government to make rules under Section 73A with respect to manner of collection of the stamp duty in all the above mentioned transactions makes the Centralized Collection Mechanism more effective. The supportive instruments to be made in due process of the above transactions will not be levied with any Stamp Duty.

II. Confusions Resolved by Centralised Collection Mechanism 

1. Basis of levying of Stamp Duty on securities

The sale of securities through stock exchange shall be made as per the market value of the securities. The uniformity of the stamp duty on the basis of the transaction’s value traded on the stock exchange at the time of settlement of a transaction. The instrumentality of the same has resolved the confusion as far as the basis of deciding the stamp duty value on such transactions is concerned. 

2. Place of levying the stamp duty

The major confusion which prevailed for a considerable period of time was the state according to which the stamp duty will be payable by the party, whether according to the place of execution of marketable security or the place of registered office of the party. The Finance Act 2019 has made it clear that the place of registered address of the issuer will be the deciding factor of the place of levying stamp duty, i.e. respective state stamp duty laws.

3. Physical form of securities

The physical form of issuance of securities and sale or transfer of security in physical form, will be dealt as per the prevailing stamp duty rates in those respective states. The Centralised Collection Mechanism has no role in physical issuance or transfer/sale of securities except that of Demat i.e. electronic form.

4. Schedule I and Uniformity of Stamp Duty Rates

The Finance Act, 2019 has made notable changes in the Schedule I of the Stamp Act, 1899, by revisiting the stamp duty rates, and has made them uniform on number of transactions. Along with such uniformity of rates, the state governments are strictly prohibited to impose or collect stamp duty on such transactional secondary instruments. Moreover, it is clearly stated that the sale or transfer of securities for consideration shall be made as per the rate mentioned in Schedule I of Act.

Therefore, the Amendments proposed by the Finance Act, 2019 in the Stamp Duty Act, 1899 have solved number of confusions and considerably affected the Stamp Duty, as far as: 

1. Basis of levying of stamp duty on securities is concerned 
2. Place of levying of stamp duty of securities or instruments is concerned. 
3. Rates of Stamp Duty of securities in Demat form is concerned.

Other than these notable transformations the Amendment has cleared the air on the rates of stamp duty to be levied on instruments and transactions, which were earlier used to be manipulated by the States or evaded by the parties themselves, thereby harming the State exchequer. 

III. Schedule I of the Indian Stamp Act, 1899

It is significant to mention that the amendment in India Stamps Act, 1899 has increased the definition meaning of instruments, including electronic instruments, and the principal instrument considered for levying the stamp duty is as per Section 9 A and no other instrument will be considered for levying stamp duty.

IV. Impact on Arrangements

1. Purchase of Listed Shares – The purchase of listed shares will be levied with stamp duty as per this amendment. The inclusion of Demat shares which were earlier exempted from stamp duty under this new law will lead to the purchase of listed shares expensive but with a uniform rate of stamp duty. This change has been effected by amending the definition under Section 2(14) of the Act, hereby including the word “electronic” in the definition of instruments.
2. Merger and Acquisition – It has been long debated in the end number of judicial pronouncements that whether the scheme of merger and amalgamation is subject to the levy of stamp duty by states. This question has been put to rest bereft of judicial pronouncements effect. It has been made clear in the Act itself by bringing of Demat shares and that of sale, transfer or transaction made through Stock Exchange or Depository under the radar of the Centralised scheme. As soon as such sale, transfer or transaction is reported to the Stock Exchange or Depository, the stamp duty runs its course on the market value of such securities at the time of settlement or on consideration amount.
3. Equity Pacts – The inclusion of equity pacts under derivatives under Schedule I of the Act has made the equity pacts expensive but streamlined them too, saving them from the inconsistent state stamp duty laws, by providing the uniform rates of stamp duty under Schedule I of Act.

 V. Critical Analysis of the Amendments

1. State Power to Legislate is compromised

By involving provisions such as Section 9A in the Act for Centralised collection mechanism wherein it is expressly mentioned that the instruments involved in transaction mentioned in Section 9A sub-section 1 will only be levied by stamp duty, and no other state government can levy its stamp duty on secondary instruments. In addition to it, the revision of Schedule I of the Act has also breached the State list and compromised their power to legislate and decide their rates of the stamp duty.

2. State Exchequer

However the State exchequer has not been compromised in the said amendments, only the collection mechanism is deflected from State Governments to Stock Exchange and Depository, which will collect the Stamp Duty on instruments on behalf of the States and transfer the same to the States within 3 weeks of every calendar month, failing which will have to pay the penalty.

Conclusion

The major takeaways are that the inconsistent State laws on stamp duty that underplayed the potential of Mergers and other business arrangements which remained in confusions due to inconsistent and corrupted system with respect to the levy of state wise Stamp Duty, will now be encouraged and bring in investments with the centralized collection mechanism bringing Stock Exchange and Depository as major players in stamp duty collection. Moreover, the demat (electronic) shares will also come under the radar of Centralised Collection Mechanism, so the purchase of listed shares will be expensive in comparison to the earlier Act, with the levy of Stamp duty. This system has without affecting the State Exchequer has streamlined the Stamp Duty collection system, bringing unified rates of stamp duty into existence.

Endnotes

1. https://www.sebi.gov.in/acts/contractact.pdf
2. Section 2(h) of Securities Contracts (Regulation) Act, 1956.
3. https://upload.indiacode.nic.in/showfile?actid=AC_CEN_2_2_00036_189902_1523339055436&type=rule&filename=stamp_act,_2019.pdf-
4. https://upload.indiacode.nic.in/showfile?actid=AC_CEN_2_2_00036_189902_1523339055436&type=rule&filename=stamp_act,_2019.pdf
5. https://upload.indiacode.nic.in/showfile?actid=AC_CEN_2_2_00036_189902_1523339055436&type=rule&filename=stamp_act,_2019.pdf
6. Section 2(h) of SCRA, 1986
7. Section 2(h) of SCRA, 1986
8. https://upload.indiacode.nic.in/schedulefile?aid=AC_CEN_2_2_00036_189902_1523339055436&rid=545
9. Section 9B (b) of the Indian Stamp Amendment Act  2019.
10. Section 4(3) of the Indian Stamp Amendment Act  2019.
11. https://upload.indiacode.nic.in/showfile?actid=AC_CEN_2_2_00036_189902_1523339055436&type=rule&filename=stamp_act,_2019.pdf
12. Section 9 A Indian Stamp Amendment Act  2019.
13. https://upload.indiacode.nic.in/schedulefile?aid=AC_CEN_2_2_00036_189902_1523339055436&rid=545
14. Section 9A sub-section (3) of the Amendment Act, 2019 of India Stamps Act, 1899
15. Section 62A of the Amendment Act, 2019 of India Stamps Act, 1899.

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