The Indian Stamp Act 1899 was implemented by British Government to generate revenue for the Government.
Stamp duty is a tax that is levied on single property purchases or documents (historically, this included the majority of legal documents such as cheques, receipts, military commissions, marriage licenses and land transactions.) A physical stamp (a revenue stamp) had to be attached to or impressed upon the document to denote that stamp duty had been paid before the document was legally effective. More modern versions of the tax no longer require an actual stamp.
Indian laws require stamp duty payments on a limited category of transaction documents. Broadly, documents affecting rights and titles to property require stamp duties to be paid. The central government requires stamp duty to be paid on several classes of transaction documents, primarily focused on securities, under the Indian Stamp Act, 1899. In addition, stamp duty may be charged by the state government for other transactions depending on state-specific legislation. For example, Maharashtra state's stamp duty law is governed by the Maharashtra Stamp Act, 1958 (Bombay Act LX of 1958 ).
Under the Indian Constitution, while the responsibility of fixing of the stamp duty is divided between the Union Government and the State Governments, its collection is vested with the State Government in which the instrument is executed. The amounts so collected are retained by the State Governments.
The present system of collection of stamp duty on securities market transactions led to multiple rates for the same instrument, resulting in jurisdictional disputes and multiple incidences of duty, thereby raising the transaction costs in the securities market and hurting capital formation.
In order to facilitate ease of doing business and to bring in uniformity of the stamp duty on securities across States and thereby build a pan-India securities market, recently, the Union Government notified Part I of Chapter IV of the Finance Act, 2019 ("Amendment") and promulgated the Indian Stamp (Collection of Stamp- Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 ("Rules") which will come into effect from 01 April 2020.
The amended provisions of the Indian Stamp Act, 1899 brought through Finance Act, 2019 and Rules made thereunder shall come into force w.e.f 1st July, 2020. vide notifications dated 30th March, 2020
The amendments propose to create the legal and institutional mechanism to enable States to collect stamp duty on securities market instruments at one place by one agency (through the Stock Exchanges or Clearing Corporations authorised by the stock exchange or by the Depositories), the Finance Ministry. The Amendments seek to:
- address the stamp duty regime recognising the technological changes in the field of financial securities, which today are primarily, done electronically through the stock exchange or through authorized clearing corporations and the depositories; and
- provide for a centralized collection mechanism under which the stamp duty is to be collected at one place by one agency (i.e. through the stock exchanges or clearing corporations authorized by the stock exchange or by the depositories) on one instrument.
KEY REFORMS OF THE AMENDED STAMP ACT AND THE RULES
- Expanded Definition of Securities Definitions: The Amended Stamp Act amends the existing definitions to align them with the definitions provided under other statutes. The Amended Stamp Act also introduces some new definitions such as “debenture”, “market value” and “securities”. The new definition of “securities” is extensive and has the net effect of extending the list of instruments liable to stamp duty.
- Dispensation of exemption to transfer of securities: under the erstwhile regime, transfer of securities in physical form was subject to the payment of stamp duty and transfer of securities in dematerialized form was exempted. This exemption has been done away with, and stamp duty is now payable on transfer of securities (with consideration) in dematerialized form.
Hence, now transfer of dematerialized securities, in addition to securities transaction tax ("STT") will also attract the additional cost of stamp duty, thereby increasing the transaction costs. For instance, transfer of shares through a stock-exchange on a delivery basis will now in addition to the STT of 0.1% on the price, also be subjected to stamp duty at the rate of 0.015% on the price of the shares transferred.
However, the transfer of registered ownership of securities from a person to a depository (i.e., conversion of physical or materialized securities to dematerialized securities) or from a depository to a beneficial owner (conversion of dematerialized securities to physical or materialized securities) shall continue to be exempted.
Similarly, the transfer of units of a Mutual Fund including units of the Unit Trust of India, that are dealt by a depository, were previously exempted from stamp duty. This exemption has been removed.
- Stamp Duty on principal instrument only: a single transaction through the stock exchange or depository often involves the execution of several instruments (e.g., notes, memorandums, etc.). To avoid multiplicity of payments of stamp duty on such transactions, the Amended Stamp Act provides that stamp duty is payable only on the principal instrument. The principal instrument for different transactions is specified in the Amended Stamp Act. The Amended Stamp Act clarifies that no stamp duty shall be charged on any instrument (other than the principal instrument) on a single transaction.
The Amendment introduces a new definition of clearance list which is each client's list of transactions of sale and purchase relating to contracts traded on the stock exchange. Following the Amendment, this clearance list will be deemed to be the principal instrument on which the stamp duty shall be payable and no additional stamp duty shall be charged on the any other instruments in relation to the same sale or purchase of securities on the stock-exchange. Further, it has been clarified that stamp duty shall be payable on each sale or purchase of securities, whether delivery based or otherwise, through a stock exchange which are listed in the clearance list. Such stamp duty will be paid by the buyer on the market value of such securities at the time of the settlement of transaction of securities of such buyer.
- Onus of payment of stamp duty: The Amended Stamp Act specifies the persons liable to pay stamp duty in different transactions. The table below summarizes the newly introduced provisions in this regard:
|Nature of transaction||Onus|
|Sale of security through stock exchange||Buyer|
|Sale of security otherwise than through stock exchange||Seller|
|Transfer of security through depository||Transferor|
|Transfer of security otherwise than through a stock exchange or depository||Transferor|
|Issue of security (whether through a stock exchange or a depository or otherwise)||Issuer|
|In case of any other instrument not specified in Section 29 of the Indian Stamp Act, 1899||By the person making, drawing or executing such instrument|
- Revised Stamp Rates: Prior to the introduction of the Amended Stamp Act, stamp duty was payable at a flat rate of 0.25% of the consideration on a transfer of shares. There was no stamp duty prescribed on the issue of shares (apart from the share certificate issued to the shareholder). The Amended Stamp Act specifies the following rates of stamp duty for different kinds of transactions involving securities:
Sl. no. Entry Stamp duty
Issuance of debentures 0.005%
Transfer or re-issuance of debentures 0.0001%
2. Securities other than debentures
- Issuance of securities 0.005%
- Transfer of securities on delivery basis 0.015%
- Transfer of securities on non-delivery basis 0.003%
- Futures (equity and commodity) 0.002%
- Options (equity and commodity) 0.003%
- Currency and interest rate derivatives 0.0001%
- Other derivatives 0.002%
- Government securities 0%
- Repo on corporate bonds 0.00001%
Mechanism for collection of stamp duty
The Amended Stamp Act and the Rules provide for the mechanism for collection of stamp duty for different transactions as follows:
(a) Stamp duty viz.-à-viz. sale of listed securities made through stock exchanges
- Date of collection of stamp duty: the stamp duty in respect of sale of listed securities through the stock exchange will be collected on the settlement day.
- Stamp duty on consideration: Where a transaction in securities is reported to a stock exchange, the stamp-duty will be collected on the entire sale consideration when the transfer is reported, even if the consideration is paid in part or in instalments to be paid in future.
- Stamp duty on tender offer, open offer, private placements, etc.: where a transaction arises from tender offer, open offer or offer for sale or private placements through stock exchange, the stamp-duty will be collected from the offeror on the market value of the security being acquired or sold out, at the offer price, once the offer is successfully completed.
(b) Stamp duty viz.-a-viz. transfer of securities in the depository system
- Date of collection of stamp duty: the stamp duty in respect of transfer of securities in the depository system will be collected before the execution of all off-market transfers.
- Stamp duty on consideration: The stamp duty will be collected on the consideration amount specified by the transferor in the delivery instruction slip. The consideration reported to the depository will be considered as the actual consideration amount.
- Stamp duty on pledge of securities: the stamp duty will be collected from a pledgee on the market value of securities, at the time of transfer of securities pursuant to invocation of pledge.
(c) Stamp duty viz.-à-viz. creation of a new security and change in records in the depository upon the issue of securities:
- Date of collection of stamp duty: the stamp duty in respect of creation of new security and change in records in the depository upon issue of securities will be collected from the issuer prior to executing any transaction in the depository system.
- Stamp duty on total market value: the stamp duty is payable on the total market value of the securities contained in the allotment list.
- No stamp duty on creation or destruction of securities: stamp duty in respect of creation or destruction of securities on account of corporate actions such as stock split, stock consolidation, mergers and acquisitions, or such similar actions, etc. will not be collected by the depository to the extent that it does not involve a change in beneficial ownership. However, a fresh issue to an investor as part of a corporate action will be subject to stamp-duty.
- Stamp duty on tender offer, open offer, private placements, etc.: in case of transactions arising from tender offer or open offer or offer for sale or private placement conducted through a depository, stamp-duty shall be collected from the offeror, on the market value of the security being acquired or sold out, at the offer price, once the offer is successfully completed.
(d) Stamp duty in case of bonus issue, gift or legacy transfer– In case of bonus issue, there is no consideration as bonus shares are issued free to existing shareholders. Similarly in case of gift or legacy transfer there is no consideration. Section 21 of the Amended Indian Stamp Act read with sub-section 16B of Section 2 clearly indicates that stamp duty is to be collected on market value which is based on price or consideration involved.
This rationalized and harmonized system through centralized collection mechanism is expected to ensure minimize cost of collection and enhance revenue productivity. Further, this system will help develop equity markets and equity culture across the length and breadth of the country, ushering in balanced regional development.