This article is written by Sanjana Jain, from Guru Gobind Singh Indraprastha University, Delhi. The article talks about what stamp duty is, how it is calculated, and on which instruments it is imposed. Further, the article also talks about stamp duty on E-agreements.
The economy of every country is based on agreements and contracts in which two parties agree on certain expressed terms and conditions which are laid down in black and white, which when signed by both the parties involved, becomes binding. Agreements being the soul and heart of businesses, need to be enforceable by law. They will be enforceable by law if they satisfy the provisions mentioned under the Indian Stamp Act, 1899 read with the Registration Act, 1908. Therefore, they should be duly stamped for being valid in the eyes of law.
According to the Indian Stamp Act, 1889, stamp duty must be paid in order to record and keep track of all the transactions. Thus, stamp duty is like proof that the deal has taken place between the parties. It is a legal entity that is valid as evidence in case of disputes in a court of law. In 2016, the amendment for the Indian Stamp Act came in the form of the Recovery of Debt Laws Bill, 2016. Thus, this article will let you know everything about stamp duty.
What is stamp duty
According to Black’s Law Dictionary, stamp duty means an additional charge levied on certain legal documents by purchasing a stamp to be placed on said document. So from the above definition, it can be interpreted that stamp duty is a charge, it can be either fixed or variable, which is levied on certain legal documents, which means that certain documents can be excluded by law from stamping and stamp duty can only be paid by purchasing a stamp and not by any other means.
Mere physical transfer of property is not valid in the eyes of law, in order to make such a transfer valid, the buyer has to pay stamp duty, which will act as proof that purchase has occurred. Therefore, stamp duty is a government tax paid at the time of transfer of property, which makes the transfer certificate valid in the court of law.
Though the rate of stamp duty varies from state to state, the general underlying principle behind the duty remains the same. Stamp duty is a legal tax that has to be paid in full for the completion of a transaction. Generally, the stamp duty is paid by the buyer, in some cases, the buyer and seller decide to split the stamp duty as per an earlier signed agreement.
The law on stamping and registration
Stamp duty in India is governed by two legislations, i.e a stamp Act legislated by the Parliament and a stamp Act legislated by the state legislature. According to Article 246 read with Schedule VII of the Indian Constitution, Parliament can enact laws relating to rates of stamp duty of bill of exchange, cheques, promissory notes, bill of lading, letter of credits, policies of insurance, transfer of shares, debentures, proxies, and receipts whereas state legislature can legislate on all those matters which are not mentioned above.
Under Section 3 of the Parliament Legislation (the Indian Stamp Act) stamp duty can be imposed on the following document:
- All the documents mentioned in the First Schedule of the Parliament Legislation;
- Every bill of exchange payable otherwise on-demand or promissory note drawn or made out of India and accepted or paid or presented for acceptance or payment, or endorsed, transferred, or otherwise negotiated; and
- All instruments mentioned in First Schedule, which have not been previously executed by any person, are executed out of India, related to any property, or to any matter or thing which has been done in India and is received in India.
Under Section 3 of the Indian Stamp Act, 1899, stamp duty will not be imposed on the following documents:
- Any instrument which is performed by or on behalf of the government in cases, but for this exemption, the duty chargeable in respect of such instrument will be paid by the Government;
- Any instrument for the purpose of sale, transfer or other disposition, either absolutely or byway or mortgage or otherwise, of any ship, or vessel registered under the Merchant Shipping Act, 1894; and
- Any instrument which is executed by, or, on behalf of, the developer, or unit or connection with the carrying out of purposes of the special economic zone.
Under Section 3 of the State Legislation (Karnataka Stamp Act, 1957), stamp duty will be imposed on the following documents:
- All the instruments mentioned in the Schedule under the state legislation, not having been executed by any person, is executed within the territories of the State of Karnataka on; and
- All the instruments mentioned in the Schedule under the state legislation which, not having been previously executed by any person, is executed out of the State of Karnataka relates to any property situated, or to any matter or thing which is done in the territories of the State of Karnataka and is received in the territories of the State of Karnataka.
Under Section 3 of the State Legislation, stamp duty will not be imposed on the following documents:
- Any instrument, which is performed by, or on behalf of, the Karnataka government in cases where, but for this exemption, the duty chargeable in respect of such instrument is paid by the Karnataka government; and
- An instrument for sale, transfer, or other disposition, either absolutely or by way of mortgage, of any ship or vessel, which is duly registered under the Merchant Shipping Act, 1958.
Points to remember regarding stamp duty
- Stamp duty is valid for six months.
- Whenever on foreign documents stamp duty is paid, it is valid for three months.
- Unless stamp duty is paid, the agreement will not be enforceable in court.
- Non-payment of the required stamp duty is a criminal offence, as per the Indian Penal Code.
- Delay in payment of stamp duty can make the individual liable to pay a fine ranging from 2% to 200% of the total payable amount.
- The stamp duty is to be made by the purchaser or buyer and not the seller.
Stamp duty calculator
Generally, it is easy to calculate stamp duty according to the rates provided by the Indian Stamp Act or the State Stamp Act. But sometimes, the person paying the duty is not able to calculate the correct stamp duty and ask for help from the collector of Stamps.
So, for calculating the stamp duty the first thing is to identify in which category the document or instrument falls under. For the purpose of stamp duty calculation, there are 3 categories of transaction:
In the first category, the charges on the stamp duty remain fixed regardless of what value is mentioned in the document or instrument. For example Deed of adoption, Article of Clerkship, Appointment in Execution of Power, Deed of apprenticeship, Award, Cancellation Deed, Duplicate, Charter Party, Copy of Extracts, Bond of indemnity, Power of Attorney, etc.
In the second category, the charges of the stamp duty are dependent upon the value mentioned in the document. For example Deed of mortgage, Agreement for lease, Deeds of title, Security Bond, Hypothecation Deed, Article of Association, etc.
In the third category, the charges of the stamp duty are dependent either on true market value or on the value mentioned in the document, whichever is higher. For example, Agreement for sale, agreement for the development, Gift exchange, Deed of partnership, Transfer of Immovable Property, Deed of trust, Partition, etc.
Liability of paying stamp duty
Liability can be imposed by agreement on either of the parties of the agreement for payment of the stamp duty. Section 29 of the parliament legislation provides the power to the parties of agreement to decide who among the parties of the agreement shall be liable to pay the stamp duty imposed on the concerned agreement, which, in absence of an agreement, imposes on certain persons the liability of paying stamp duty. Similarly, Section 30 of the state legislature provides a choice to the parties of the agreement to decide who among the parties of the agreement shall be liable to pay the stamp duty imposed on the concerned agreement and which in absence of any such agreement, impose on a particular party the liability of paying stamp duty.
It is logical to pass the burden of paying the stamp duty on the party who is paying the consideration under the agreement, as stamp duty is the cost to the subject matter of the agreement.
Penalty for non-compliance
Both the parliament and state legislature provide that an unstamped or inadequately stamped document will not be enforceable in a court of law as evidence. The following provisions highlight the effect of an inadequately stamped document:
- Section 33 of the state legislature and Section 33 of the parliament legislature, provides that if it came into notice of an authorized person that any instrument or agreement is inadequately stamped, then such authorized person can take in custody such agreement or instrument.
- Section 34 of the state legislature and Section 35 of the parliament legislature, provides that an inadequately stamped instrument or agreement is not enforceable in a court of law as evidence and such instrument or agreement is subject to certain exceptions as mentioned under the section.
- Section 35 of the state legislature and Section 36 of the parliament legislature, provides that if an inadequately stamped instrument or agreement is recorded as evidence it will not be enforceable in a court of law unless the legislature thinks that such an instrument bears sufficient stamp, and permit enforceability of such instrument on payment of such charge as deems fit.
Whether all agreements should be on stamp paper
No, agreements can be made on both the stamp paper and on non-stamp paper also. According to the Indian Contract Act, 1872 an agreement can be enforceable if it fulfils all the essential conditions like offer, acceptance, lawful object, consideration, competent parties, and free consent. It is important to note that in India, even oral agreements are valid and enforceable under the contract Act, provided they fulfil all the essential conditions of a contract. The Indian Contract Act, 1872, does not contain any provision that makes stamping of agreement compulsory or declaring any unstamped agreement as invalid or unenforceable. So from this, it is clear that for an agreement to be valid, stamping is not necessary and even without a stamp they are valid and enforceable.
Stamp duty implication on e-agreement
Under the Indian Stamp Act, there is no provision that deals with electronic agreements or stamp duty payable on such agreements.
Most of the state stamp legislation does not have any provision related to electronic records except some like in Maharashtra the Maharashtra Stamp Act, 1958 (“MSA”) mentions electronic records in the definition of “instrument’ . States like Delhi, Uttar Pradesh, Karnataka, Gujarat, and Rajasthan mention electronic records within the definition of the term “instrument”, thus imposing stamp duty on electronic records.
Stamp duty is payable to the state government for recognizing an agreement by the parties to an agreement. It is the revenue for the state government, even if it is levied by the central government and if any agreement is inadequately stamped, the state government has the power to impound or nullify the effect of such an agreement.