Pursuant to the powers vested in the Central Government under the Constitution of India, earlier this year the Ministry of Finance introduced certain amendments to the Indian Stamp Act, 1899 (“Stamp Act”) as part of the Finance Act, 2019 (“2019 Act”). Although certain provisions of the 2019 Act came into force with effect from April 01, 2019, the provisions relating to the amendments to the Stamp Act have been notified only now and will come into force with effect from January 09, 2020.

The objective of the proposed amendments to the Stamp Act is to provide a comprehensive framework on stamp duty for issuance and transfer of securities irrespective of the medium of such issuance or transfer (whether in physical form or done electronically through depositories or stock exchanges). 

Key Amendment to the Stamp Act

  1. Only principal instrument to be stamped: It has been clarified that in case of securities related transactions on stock exchanges and depositories, the instrument as mentioned for such transactions shall be considered to be the principal instrument[2] chargeable with stamp duty and no other instrument shall be charged with duty relating to that transaction.Whilst this brings abundant clarity vis-à-vis transactions through depositories / stock exchanges, the aforesaid will not apply to offline transactions leaving it open to debate on whether stamp duty will continue to be paid on each instrument forming part of the transaction.
  2. Stamp Duty on depository-based transactions: Section 8A (Securities not liable to stamp duty) of the Stamp Act which provides for transfer of beneficial ownership of securities and the beneficial ownership of units of mutual funds that are dealt with by a depository, are not liable to stamp duty under the Stamp Act. The Finance Act does away with the aforesaid exemptions.
  3. Stamp Duty chargeable on transactions through stock exchange and depositories: Until now, stamp duty is required to be paid on a note or memorandum delivered by a broker or agent to its principal, intimating the sale or purchase on account of such principal of any stock or marketable security[3]. However, with the change in trading style, there is not always a physical exchange of a note or memorandum. Once the amendments to the Stamp Act are notified, stamp duty shall be payable on each sale or purchase of securities, whether delivery based or otherwise, through a stock exchange or depository. The Central Government has also notified rules on manner of collection of stamp duty.[4]

Following is a table briefly summarising the nature of securities transactions which will now be subject to payment of stamp duty along with other modalities for payment of stamp duty in such cases.

Sr. No. Nature of Transaction Stamp Duty by whom payable Collection of Stamp Duty Where payable (“W.P.”) / Beneficiary Govt. (“B.G.”) Amount on which stamp duty payable
1. Sale of securities through stock exchange. Buyer Stock exchange or clearing corporation B.G.: Place of residence of the Buyer. If Buyer is a non-resident, the registered office of the trading member. Market value[5] of such securities.
2. Sale of securities through depositories, for other than the transactions mentioned in (1) above. Transferor Depository B.G.: Place of residence of the Buyer. If the Buyer is a non-resident, the registered office of the trading member. Consideration amount of such transfer.
3. Issuance of securities through depositories. Issuer Depository B.G.: Place of residence of the subscriber. Market value of the securities.
4. Issuance of securities, otherwise than through a stock exchange or depository. Issuer Directly to the government. W.P.: Registered office of the Issuer. Market value of the securities.
5. Sale or reissuance of securities, otherwise than through a stock exchange or depository. Seller Directly to the government. W.P.: Place of residence of the Buyer. If Buyer is a non-resident, the registered office of the trading member. Consideration amount mentioned on the instrument.
  1. Penalty for failure to comply with the aforesaid: Any person who is required to collect duty or transfer such duty to the State Government as aforesaid and fails to do so, shall be punishable with fine of not less than INR 1,00,000/- (Indian Rupees One Lakh only), extendable up to 1% (one percent) of the defaulted collection.Further, any person who fails to submit details of transactions to the State Government or submits a false declaration shall be punishable with fine of not less than INR 1,00,000/- (Indian Rupees One Lakh only) for each day during which the failure continues or INR 1,00,00,000/- (Indian Rupees One Crore only), whichever is lesser.
  1. Rates of Stamp Duties (Schedule I): In connection with the aforesaid, the rates of stamp duty have also been modified through an amendment to Schedule I of the Stamp Act (“the Schedule”).

The rates prescribed by the 2019 Act are as follows:

Sr. No. Particulars Rate of Stamp Duty
(a) Issue of security other than debenture; 0.005%
(b) Transfer of security other than debenture on delivery basis; 0.015%
(c) Transfer of security other than debenture on non-delivery basis; 0.003%
(d) Derivatives –
(i)             Futures (equity and commodity) 0.002%
(ii)            Options (equity and commodity) 0.003%
(iii)          Currency and interest rate derivatives 0.0001%
(iv)          Other derivatives 0.002%
(e) Government securities 0%
(f) Repo on corporate bonds 0.00001%

 

Conclusion

The existing structure of collection of stamp duty on securities transactions has created multiple rates of duties for the same instruments across States and, therefore, has resulted in duty shopping. The rationalisation of the rates of stamp duty along with bringing electronic / demat transactions at par with physical transaction is a move in the right direction.

From a legal perspective however, the manner in which the amendment has been proposed, is capable of being challenged. The amendments to Stamp Act have been proposed pursuant to the powers conferred on the Central Government under Entry 91 of the List I and Entry 44 of the List III of the Seventh Schedule of the Constitution of India. However, from a closer reading of Entry 91 of List I, it is clear that Central Government has powers to make laws only in relation to ‘rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts’ (emphasis supplied). On the other hand, Entry 63 of List II states that the State Governments have power to make laws in relation to rates of stamp duty in respect of documents which are not mentioned in the List I of the Constitution. Therefore, from a reading of the aforesaid two entries together, it seems that the Central Government has authority to only legislate on transfer of shares and by virtue of List II, the State Government is entitled to legislate on issue of shares. Consequently, it may be arguable that the Central Government has gone beyond its powers by legislating on matters which fall under the State list. In a scenario where the constitutional validity of the amendment is challenged per se, it will be interesting to see how the judiciary reacts to it.

To download the article: Legal Update – Amendment to Indian Stamp Act 1899

[1] By Siddharth Manchanda, Partner and Rohit Jain, Associate

[2] The definition of ‘instrument’ has been widened to include any document, electronic or otherwise, created for a transaction in a depository or a stock exchange by which any rights or liabilities are transferred, created, extended.

[3] The definition of ‘marketable security’ has been substituted to mean any security capable of being traded in any stock exchange in India.

[4] Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019

[5] The term ‘market value’ has been defined under the 2019 Act as (a) if the security is traded, then the price at which the security is traded; and (b) in other cases, the consideration or the price which is mentioned in the instrument shall be considered as market value. Provided that the market value for calculating the stamp duty shall be in case of (i) options in any securities, premium paid by the buyer; (ii) repo on corporate  bonds, interest paid by the buyer; and (iii) swap, the first leg of the cash flow.

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