Stamp duty is an ad valorem tax payable on the value of an instrument used for various transactions- commercial or otherwise.
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.
Now the fixing of stamp duty including for transfer of shares is on the Central Government vide Entry 91 of Union List and some transactions including issue of shares is on State Government vide Entry 63 of State List.
The aim of bringing this amendment is 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.
MAJOR CHANGES IN THE LAW
The Union Government after due deliberations, notified Part I of Chapter IV of the Finance Act, 2019 and promulgated the Indian Stamp (Collection of Stamp- Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019. The Amendment seeks to make many changes including these 5 major ones that are:
- Uniform stamp duty across the country
Earlier different rates of stamp duty were specified by different states. “Since some states levied very low rates on speculative trades and there was a tax arbitrage to be had by basing your office in such states. This arbitrage will now go due to a uniform rate across the country
People in states with high stamp duty rates will benefit from the uniform stamp duty. On the other hand, proprietary or high frequency traders who opportunistically located themselves in low stamp duty states will pay more.
- Stamp duty on off-market transactions
There was previously no stamp duty on off market transactions in demat mode. Mainly this involved the purchase and sale of unlisted shares but also other kinds of off market transactions like gifts of financial securities.
The circular aims to standardize the collection of stamp duty and plug certain loopholes. Transfer of shares of unlisted entities in physical form invited a stamp duty of 0.25% but this could be circumvented by transferring the shares in a demat form. But now that’s not the case.
- Stamp duty on buyer, not buyer and seller
In the extant scenario, stamp duty was payable by both seller and buyer whereas in the new system it is levied only on one side.
The new rules remove the double imposition of stamp duty on buyer and seller.
- Collection by stock exchanges, clearing corporations and depositories
Earlier brokers had to register with different states and collect and pay stamp duty to them. Now the exchanges will do the payment to states on behalf of brokers, reducing the burden on brokers.
- Clarity on which state will collect the stamp duty
The notification clarifies on various aspects of the amendments made to the Indian Stamp Act 1899. There was always this question of whether the stamp duty would be paid to the state where the client is located or where the broker is situated. As a matter of practice, brokers used to pay stamp duty to states where the contract note was issued.
The notification clarifies that stamp duty will be payable to the state in which the client and specifically the buyer in a transaction is located.
Now, for issue, sale or transfer of securities, the instrument on which stamp-duty is chargeable under section 9A shall now be the principal instrument and no stamp-duty shall be charged on any other instruments relating to any such transaction
- Clearance List: It means a list of transactions of sale and purchase relating to contracts traded on the stock exchanges submitted to a clearing corporation in accordance with the law for the time being in force in this behalf.
- Market Value: “market value”, in relation to an instrument through which—price at which it is so traded in case any security is traded in a stock exchange;
- the price or the consideration mentioned in such instrument in case any security which is transferred through a depository but not traded in the stock exchange;
- In all other cases which mean security is sold through physical mode like endorsement, transfer through certificates but not through any Stock exchange or Depository, the Market Value will be the price or consideration mentioned in the instrument.
Now, the concept of levying duty is changed from the value of issue of securities to the consideration or issue price of the securities specifically in case of listed entities and the reason of that amendments may be other laws especially Income Tax Act and Companies Act which require an entity to issue securities on fair market value.
- Allotment List: It means a list containing details of allotment of the securities intimated by the issuer to the depository under Section 8(2) the Depositories, Act, 1996.
- Participant: The term “participant” shall have the same meaning as assigned to it in clause (g) of section 2 of the Depositories Act, 1996.
PROCEDURE OF STAMP DUTY PAYMENTS FOR SECURITIES
- Sale of any securities made through a stock exchange, whether delivery based or otherwise to be levied as per clearance list and would be now collected by stock exchange or clearing corporation as authorized by it from the buyer or offeror in case including but not limited to tender offer, open offer or offer for sale, private placements. It would be calculated on per the market value of securities at the time of settlement of transactions in securities of such buyer.
- Transfer of securities through depositories (i.e. off market transactions, over the counter occurring in demat or electronic form and also case of pledge) – whether delivery based or otherwise would be collected by depository, from the transferor before execution of all off-market transfers involving transfer of securities in the depository system on consideration amount specified therein.
- If the consideration is paid in part or in installments, stamp-duty shall be collected by the depository on the entire sale consideration when a transfer is affected.
- In the case of transfer of securities pursuant to invocation of pledge, duty shall be collected from the pledgee on the market value of the securities.
- Issue of securities through the Depository – In this casethe stamp duty would be leviedon the allotment list by the depository from the issuer (in cases including acquisition of shares of minority shareholders by majority shareholders under section 236 of Companies Act, 2013 implemented by way of a corporate action) or offeror (in cases like tender offer or open offer or offer for sale or private placement conducted through a depository) on total market value as contained in the allotment list.
- Issue of securities is made by an issuer in physical form (i.e. otherwise than through a stock exchange or depository), By the issuer, at the place where its registered office is located, on total market value i.e. the issuer price
There is no change in the manner in which stamp duty is levied and collected in case of issuance of any securities other than through stock exchange or depository but it solves one of major & most controversial issue of place of levying the stamp duty specifically in case of shares certificate, where there is always a dilemma to pay stamp duty at the rate prevailing in the state where registered office of the Issuer is situated or the state where instrument is executed. This has now been clarified to be on the price or consideration mentioned in the instrument payable by the Issuer in the State where its registered office is located.
- Sale or transfer or reissue of securities for consideration in physical form (i.e. otherwise than through a stock exchange or depository) – In this also there is no change in the collection of stamp duty presently prevailing in the States. It is now stated to be paid by the seller or transferor or issuer, as the case may be, on the consideration amount specified in such instrument.
All the duty is to be calculated as per revised Schedule I.
PROCESS AFTER COLLECTION OF STAMP DUTY
As per the changes brought, there are 5 situations of levying stamp duty:
- The stock exchange or a clearing corporation authorised by it or the depository, within 3 weeks of the end of each month after deducting 0.2 per cent of the stamp-duty collected on behalf of the State Government towards facilitation charges before transferring the same to such State Government, transfer the stamp-duty as collected to the State Government and shall also submit to the Government details of these transactions within seven days of the succeeding month.
- The collecting agent shall furnish a consolidated return of stamp-duty collected during a financial year manually or electronically on or before the 30th June immediately following that financial year to the concerned State Government and the Accountant General of each State.
- How to identify the relevant State Government to which the duty be transferred: There are following two situations:
Situation 1: If the buyer is resident in India – State where the residence of the buyer is located
Situation 2: In case the buyer is located outside India,
(a) to the State Government having the registered office of the trading member or broker of such buyer
(b) where there is no such trading member of the buyer, to the State Government having the registered office of the participant
- Any person who fails to collect the duty or fails to transfer the duty to State Government within fifteen days of the expiry of the time – Punishable with fine which shall not be less than 1 lac rupees, but which may extend upto 1% of the collection or transfer so defaulted.
- Any person who fails to submit details of transactions to the Government or submits a document or makes a declaration which is false or which such person knows or believes to be false- Punishable with fine of 1 lac rupees for each day during which such failure continues or 1 crore rupees, whichever is less.
REVISED RATES OF STAMP DUTY
|Issue of any security including debenture;||0.005%|
|Transfer and re-issue of debentures||0.0001%|
|Transfer of security other than debenture on delivery basis||0.015%|
|Transfer of security other than debenture on non-delivery basis||0.003%|
|(i) Futures (equity and commodity) (ii) Options (equity and commodity) (iii) Currency and interest rate derivatives (iv) Other derivatives||0.002% 0.003% 0.0001% 0.002%|
|Repo on corporate bonds||0.00001%|
The nature of a particular transfer of securities through a stock exchange or clearing corporations whether to be treated as on delivery basis or on non-delivery basis shall be determined by the clearing corporation at the time of settlement.
- Creation or destruction of securities in case of Stock Splits, stock consolidation, mergers & acquisitions or such other similar corporate actions if it does not involve change in beneficial ownership.
- Transfer of registered ownership of securities from a person to depository (Demat) or from depository to beneficial owner
Here it is to be noted that issue of securities pursuant to any scheme of merger and amalgamation will continue to attract Stamp Duty.
With the amendments in the Stamp Act, the Central Government aims to bring sale or transfer of securities through electronic mode, within the ambit of stamp duty and create additional revenue to the State Governments and also lay at rest certain ambiguities in the current law. Single rate and centralized system aims to streamline the entire process, reduce the cost of collection and plug revenue leakage. However, this will lead to increase in cost of trading in securities as transactions specifically on stock exchanges are already subject to securities transaction tax. What needs to be seen is how well the collection mechanism is implemented by the Collecting agents specifically in case of stamp duty on trade on stock exchanges.