This article is written by Soumi Ghose who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (including PE and VC transactions) from LawSikho.
Table of Contents
Introduction
Since liberalization India had been taking various steps to position itself in the global economy by cementing its business relationship across the world and this effort had intensified during the last few decades. With a view to accelerate this process, the country had been focusing on the moto of “ease of doing business” in India. In accordance with it, amendments to the Indian Stamp Act, 1899 was proposed under the Finance Act, 2019 and Indian Stamp (Collection of Stamp-Duty through Stock Exchange, Clearing Corporation and Depositories) Rules, 2019. Subsequently, with effect from July 1, 2020 the amendments to the Indian Stamp Act, 1899 became effective.
There were two major rationale behind amending Indian Stamp Act, 1899 were:- a) to facilitate ease of doing business; b) bring in uniformity in stamp duty payments on matters like issue and transfer of securities and it has also introduced significant changes to the erstwhile stamp duty regime. This amendment not only clearly lays down the rates of stamp duty but also the process of levying and collecting the stamp duty. Therefore, there is a paradigm shift due to this amendment, resulting to the fundamental change in the stamp duty regime. It has brought in the change that the taxable event has shifted from “execution of an instrument listed in the constitutional schedule” to the “corporate action with regard to any transaction”. However, this shift would be subject to the judicial scrutiny proving its constitutional validity in order to make it eligible for consideration and implementation as the case may be.
Background and Constitutional Provisions in relation to “Indian Stamp Act, 1899”
The British Government in the year 1899 had amended the Indian Stamp Act with an object to formulate this legislation as a “revenue generating instrument” for the Government, therefore, it is the fiscal legislation of India under the name of Indian Stamp Act, 1899, acting as the revenue-generating mechanism for the Government.
Under the “Union List” i.e. List – I of Schedule – 7 of the Indian Constitution, Entry – 91 – gives power to the Union Legislature to prescribe the rates of stamp duty on matters namely:- bills of exchange, cheque, promissory notes, bill of lading, letters of credit, policies of insurance, transfer of shares debentures, proxies and receipts.
Under the “State List” i.e. List – II of Schedule – 7 of the Indian Constitution confers power to prescribe the “rates of duties” payable on those instruments other than the ones specified in the Union List with the legislature of respective states.
All such matters, excluding the rates of stamp duties in relation to both the classes of instruments are the subject of Entry 44 of the List III of Schedule 7 (“Concurrent List”) of the Indian Constitution.
Therefore, with regard to the rate of stamp duty to be levied on the instruments of commercial character and rates of duties on other instruments are subject to State legislation and not on the provisions of the Indian Stamp Act, 1899, which is in force across India.
Certain states like that of Andhra Pradesh, Madhya Pradesh, Punjab as well as the Union Territory of Delhi have added separate schedules to the Indian Stamp Act, 1899.
Additionally, states like:- Tamil Nadu, Assam and North Eastern States have made changes in the Schedule I of the Indian Stamp Act, 1899.
Provisions of the Indian Stamp Act which were amended in 2020
This amendment has introduced Article – 56A under Schedule –I of the Indian Stamp Act, which prescribes the new Stamp Duty rates for different kinds of transactions in relation to securities except debentures:-
|
Nature of Transaction |
New Stamp Duty Rates (applicable with effect from 1 July 2020) |
Stamp Duty Rates applicable prior to 1 July 2020 (Maharashtra Stamp Act, 1958 is considered for this comparison purpose) |
|
Issue of securities (other than debentures) through a stock exchange, depositories or otherwise |
0.005% |
0.1% |
|
Issue of debentures through a stock exchange, depositories or otherwise |
0.005% (Under Article 27 of Schedule I of the Act earlier debentures were mentioned as the ‘marketable securities’ and were liable to be stamped. By virtue of this amendment, the words “being marketable security” is deleted and therefore, stamp duty is now levied on all types of debentures, immaterial of being marketable or not.)
|
0.05% per year of the face value of the debenture, subject to the maximum of 0.25% or INR 25,00,000 (Indian Rupees Twenty Five Lakhs) whichever is lower. (It was payable on debentures being marketable securities) |
|
Transfer of securities (other than debentures) in dematerialized form |
0.015% (transfer on delivery basis) 0.003% (transfer on non-delivery basis) |
NIL |
|
Transfer of securities (other than debentures) in physical form |
0.25% |
|
|
Transfer of debentures |
0.0001% |
0.05% per year of the face value of the debenture, subject to the maximum of 0.25% or INR 25,00,000 (Indian Rupees Twenty Five Lakhs) whichever is lower. (It was payable on debentures being marketable securities). |
Changes in “Stamp Duty Payment” under the amended Stamp Act are as follows
Types of Transactions when the onus of Stamp Duty payment is on Issuer as well as when the stamp duty is payable
- In the event of issuance of such securities which results in creation or change in records of the depository, then stamp duty will be payable on the total market value of the securities mentioned in the allotment list;
- For issuance of securities neither through any stock exchange nor through depository, then the stamp duty payable will be on the total market value of the securities.
Types of Transactions when the onus of Stamp Duty payment is on Buyer as well as when the stamp duty is payable
- In cases of sale of listed securities through any stock exchange, then the stamp duty will be payable on the price at which the securities are traded at.
Types of Transactions when the onus of Stamp Duty payment is on Transferor as well as when the stamp duty is payable
- In the event of off market transfer of securities made through a depository, then the stamp duty will be payable on the consideration amount mentioned on the “depository instruction slips”;
- For instances of transfer of securities not through any stock exchange/ depository, then the stamp duty will be payable on the consideration amount mentioned on the “share transfer”.
Other changes by virtue of the Amendment
Some of the key definitions of the Act were changed/ introduced and those are as follows
- Instruments: The definition of the term “instruments” is expanded under the Amended Act. This term now includes “a document, electronic or otherwise, created for a transaction in a stock exchange or depository by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguish or recorded”.
- Securities: The definition of the term “securities” is expanded under the Amended Act. This term now includes “certificate of deposit, commercial paper, commercial usage bill, repo on corporate bonds and such other debt instrument of original or initial maturity up to one year.
- Debentures: This Amendment had brought in an inclusive definition of debentures. The term “debentures” include:- i) debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not; (ii) bonds in the nature of debentures; (iii) certificate of deposit, commercial usage bil, commercial paperand such other debt instrument which RBI may specify; (iv) securitized debt instruments; and (v) any other debt instruments as may be specified by SEBI.
- Market Value: The definition of “market value” is introduced under this amendment and it is used in relation to an instrument :- (i) the price at which such instrument is traded in any stock exchange; (ii) price or consideration mentioned on any instrument which is in the nature of security and transferred through a depository.
By virtue of this Amendment, now Stamp Duty is payable even for dematerialized share transfer under Section – 8A of the Act
Changes made in relation to “collection of stamp duty” are as follows
This amendment creates a legal as well as institutional mechanism with a better carity to enable the states to collect stamp duty on all securities market instruments at one place by one agency. The following are the detailed description in this regard:
- Stock exchange or clearing corporations shall collect the stamp duty for sale or transfer of securities through stock exchange;
- Depositories shall collect the stamp duty for those shares which are transferred through the depositories.
Conclusion
This amendment is materialized with the thought of rationalization and harmonization of stamp duty system through centralized collection mechanism. It is expected to ensure minimization of cost of collection and enhanced revenue collection. This changes will do away with the practice of doing away with certain states and choosing some favorable states which used to provide lower stamp duty. Therefore, it can be concluded stating that this amendment has introduced a “uniform system for collection and payment of stamp duty” on the issue and transfer of securities.
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