Single point collection of stamp duty - Vinod Kothari
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Single point collection of stamp duty
Interim Budget rationalises Indian Stamp Act
- CS Anita Baid and Kanakprabha Jethani
An interim budget has its own limitations and one was not expecting the Finance Minister to go all out
into a reforms agenda; however, considering the limitations, the precious bit that has been attempted
in terms of reforming the stamp duty norms is commendable.
The Finance Act, 20191 amends the Indian Stamp Act, 18992 (‘Act’), to levy and administrate stamp
duty on securities market instruments by the states at one place through one agency, viz., through
stock exchanges or its clearing corporation or depositories on one instrument, and for appropriately
sharing the same with respective State Governments based on state of domicile of the ultimate buying
client.
A notification3 issued by Ministry of Finance issued on March 30, 2020 has deferred the applicability of
the amendment to July 01, 2020.4 Further, Ministry of Finance also introduced Indian Stamp (Collection
of Stamp Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 (‘Rules’)5
to supplement the amendments to the Act, which shall also be effective from July 01, 20206.
In the past there was considerable confusion about stamp duty in things like contract notes. This
amendment tries to resolve the difficulty by inserting the definition of ‘securities’ and ‘debenture’.
Chargeability of stamp duty
In terms of Section 3 of the Act, every instrument executed in the territories of India and received in
India after being executed outside India shall be chargeable with the duty indicated in the Schedule I of
the Act. Earlier the definition of the term instrument was limited to include every document by which
any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or
recorded. However, in the Finance Act, 2019 the applicability has been expanded, wherein the revised
definition is read as-
(14) “instrument” includes—
(a) every document, by which any right or liability is, or purports to be, created, transferred,
limited, extended, extinguished or recorded;
(b) 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, extinguished or recorded; and
(c) any other document mentioned in Schedule I,
but does not include such instruments as may be specified by the Government, by notification
in the Official Gazette;
1 http://egazette.nic.in/WriteReadData/2019/198304.pdf
2 https://indiacode.nic.in/acts/2.%20Indian%20Stamp%20Act,%201899.pdf
3 http://egazette.nic.in/WriteReadData/2020/218957.pdf
4 Refer our snippet on applicability timelines here- http://vinodkothari.com/2020/03/deferral-of-applicability-of-
amendments-in-the-indian-stamp-act-1899/
5 http://egazette.nic.in/WriteReadData/2019/214585.pdf
6 http://egazette.nic.in/WriteReadData/2020/218954.pdfThe government has imposed stamp duty on electronic documents for transactions in stock exchanges
and depositories, instead of abolishing stamp duty, given the fact that securities transaction tax (STT)
is already levied on all such transactions.
On one hand the Government is intending to move towards ensuring complete dematerialisation, but
on the other hand levy of stamp duty, becomes demotivating. Levy of both stamp duty and STT on
transactions through stock exchange would increase cost of transaction for investors.
Definition of Securities
The new insertion of the definition of securities is intended to include even negotiable instruments
under its purview. The definition is as follows:
(23A) “securities” includes—
(i) securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation)
Act, 1956;
(ii) a “derivative” as defined in clause (a) of section 45U of the Reserve Bank of India Act,
1934;
(iii) a certificate of deposit, commercial usance bill, commercial paper, repo on corporate
bonds and such other debt instrument of original or initial maturity upto one year as the
Reserve Bank of India may specify from time to time; and
(iv) any other instrument declared by the Central Government, by notification in the Official
Gazette, to be securities for the purposes of this Act
In view of the marketability, commercial papers are not security but these are only in the form of a
promissory note and a negotiable instrument, which is transferable by negotiation between two parties
unlike a security which is a marketable instrument transferable by registered transfer only. Also,
considering the nature and characteristics of CPs, they are in the nature of short term borrowings and
not securities.
Separate category for Debentures
The existing definition of bond has been modified to exclude debentures and define it separately.
Revised clause (5), shall read as follows:
(5) “Bond” includes—
(a) any instrument whereby a person obliges himself to pay money to another, on condition
that the obligation shall be void if a specified act is performed, or is not performed, as the
case may be;
(b) any instrument attested by a witness and not payable to order or bearer, whereby a
person obliges himself to pay money to another; and
(c) any instrument so attested, whereby a person obliges himself to deliver grain or other
agricultural produce to another
but does not include a debenture;
Further, the definition of ‘debenture’ has been inserted, after clause (10), as follows:–
‘(10A) “debenture” includes––
(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 debenture issued by any incorporated company or body
corporate;
(iii) certificate of deposit, commercial usance bill, commercial paper and such other debt
instrument of original or initial maturity upto one year as the Reserve Bank of India may
specify from time to time;
(iv) securitised debt instruments; and
(v) any other debt instruments specified by the Securities and Exchange Board of India from
time to time;
The aforesaid definition is in contradiction to the definition under Companies Act, 2013 which
categorically excludes instruments covered under Chapter III-D of RBI Act, 1939.
Though debentures have specifically been excluded from the definition of bond, however, the
definition of debenture includes bonds issued by companies or body corporate to evidence a debt. In
common market parlance, bond market is used in India which included debenture. And since bonds in
the nature of debenture are still included in the definition of debenture issuance of bonds by company
will be covered in the definition of debenture. Earlier, the term’ debenture’ was not defined in the Act
but was specified in Schedule I. In the absence of such definition and as specified in Schedule I, stamp
duty was levied only in case the debenture was a “Marketable Security” transferable by endorsement
or by a separate instrument of transfer or by delivery.
Further, as per Schedule I, debenture issued in terms of a registered mortgage-deed, duly stamped in
respect of the full amount of debentures to be issued thereunder, was exempted from the applicability
of stamp duty. However, the said exemption seems to be removed from Schedule I. This will lead to an
increase in the cost of raising debt. The entire practice of issuing securities backed by assets, such as
land purchased in Gujarat or Tamil Nadu, that has been an antiquated practice, shall become absolutely
absurd. In most of the cases, though it was absurdity that a series of transactions were undertaken
wherein the same land was mortgage, but pursuant to the removal of exemption, mortgage-debt will
become meaningless.
Further, the term “marketable security” as defined under Section 2 (16A) of the Act has also been
amended to remove the reference to United Kingdom, as follows:
(16A) “marketable security” means a security capable of being traded in any stock exchange in
India;
The intent of the aforesaid definition is not just to include listed securities but even unlisted securities
that do not have any restriction of transferability. It was even held in the case of Bhagwati Developers
Pvt. Ltd vs Peerless Gen.Finance7 that whatever is capable of being bought and sold in a market is
marketable. There is no warrant whatsoever for limiting the expression “marketable securities” only to
those securities which are quoted in the stock exchange.
Securitised Debt Instrument
Securities issued by a Special Purpose Vehicle or SPV, has been classified as debenture. In last year’s
Budget Speech, the Finance Minister announced appropriate changes to permit listing and trading of
Security Receipts (SRs), issued by a securitisation company or a reconstruction company under the
SARFAESI Act, in SEBI registered stock exchanges. This was done to enhance capital flows in to the
7
https://indiankanoon.org/doc/6790041/securitisation industry and particularly deal with bank NPAs. However, the levy of stamp duty on the
issuance and transfer of SDI is not in line with the intentions of the government.
Pursuant to the insertion of the definition of debenture, there is no difference between a debenture
and a securitised debt instrument. Stamp duty is a crucial issue for securitization transactions. It can
add up to a substantial cost in the transaction.
SDIs are pro-rated interest in receivables held by the SPV in trust. Hence, transfer of SDI is only a transfer
of beneficial interest, or re-alignment of the proportions in which beneficial interest is recorded by the
SPV. There is no transfer of assets as the SPV continues to hold the receivables. Therefore, the question
of stamp duty applicable on such transfer of SDIs must not arise.
Moody’s in a Special report titled An Overview of U.K. Stamp Duty and its Impact on UK Securitisation
Transactions have opined that the grant of trust interest by the trustees by issue of notes is NOT a
stampable transfer, as the trustees do not transfer any asset, but merely indicate beneficial interest. By
the same ground, transfer of such notes is only a re-adjustment of beneficial interests, and will not,
therefore, be liable to duty.
However, the major issue of stamp duty of assignment of receivables still remains unaddressed. The
securitisation industry has been waiting for relief in this regard, which has not been considered by the
Government in the budget.
Securities dealt in depository
Upon issuance of securities by a company or issuer to their respective depositories, the same is
chargeable with duty on the total amount of security issued. Section 8A of the Act nowhere specifically
mentions that the shares issued in physical form are only chargeable to stamp duty or share issued in
demat form are not chargeable to stamp duty. Hence, stamp duty is payable at the time of issue of
shares as per the provisions of the Stamp Act, 1899. However, the transfer of securities held in demat
form, were not chargeable with stamp duty.
The amendment to section 8A removes the exemption given to transfer of beneficial ownership of
securities and mutual funds, dealt with through a depository. The same has been specifically covered
by the insertion of Section 9A.
Existing Provision Amendment
8A. Securities dealt in depository not liable to 8A. Notwithstanding anything contained in this Act
stamp duty. — or any other law for the time being in force,
Notwithstanding anything contained in this Act a. an issuer, by the issue of securities to one or
or any other law for the time being in force, — more depositories, shall, in respect of such
a. an issuer, by the issue of securities to one issue, be chargeable with duty on the total
or more depositories, shall, in respect of amount of securities issued by it and such
such issue, be chargeable with duty on the securities need not be stamped;
total amount of security issued by it and b. the transfer of registered ownership of
such securities need not be stamped; securities from a person to a depository or
b. where an issuer issues certificate of from a depository to a beneficial owner shall
security under sub-section (3) of section 14 not be liable to duty.
of the Depositories Act, 1996 (22 of 1996),
on such certificate duty shall be payable as Explanation.—For the purposes of this section, the
is payable on the issue of duplicate expression “beneficial ownership” shall have the
certificate under this Act; same meaning as assigned to it in clause (a) of sub-
c. the transfer of—d. registered ownership of securities from a section (1) of section 2 of the Depositories Act,
person to a depository or from a depository 1996
to a beneficial owner;
e. beneficial ownership of securities, dealt
with by a depository;
f. beneficial ownership of units, such units
being units of a Mutual Fund including units
of the Unit Trust of India established under
sub-section (1) of section 3 of the Unit
Trust of India Act, 1963 (52 of 1963), dealt
with by a depository, shall not be liable to
duty under this Act or any other law for the
time being in force.
Explanation
1.—For the purposes of this section, the
expressions ―beneficial ownership‖,
―depository‖ and ―issuer‖ shall have the
meanings respectively assigned to them in
clauses (a), I and (f) of sub-section (1) of section
2 of the Depositories Act, 1996 (22 of 1996).
Explanation 2.—For the purposes of this section,
the expression ―securities‖ shall have the
meaning assigned to it in clause (h) of section 2
of the Securities Contracts (Regulation) Act,
1956 (42 of 1956).
Instruments chargeable with duty
For transactions in stock exchange and depositories
With the insertion of a separate chapter namely, AA- Of the liability of instruments of transaction in
stock exchanges and depositories to duty, the intention is to bring all transactions through stock
exchange under the purview of stamp duty. Accordingly stamp duty shall be levied on the following
transactions:
a. sale of securities through a stock exchange,
b. transfer of securities of a consideration through a depository,
c. creation or change in the records of a depository pursuant to issue of securities. Circumstances
such as consolidation of shares or bonus issue and such other case, would result in change in the
records of the depository.
Further, the stock exchange or a clearing corporation or depository shall collect the stamp duty from
the person liable to pay such duty, mentioned below.
For transactions otherwise than through stock exchanges and depositories
The insertion of section 9B shall impose stamp duty on the issue or sale or transfer or reissue of
securities other than through stock exchange or depository. The relevant extract is produced herein
below:
9B. Notwithstanding anything contained in this Act,––(a) when any issue of securities is made by an issuer otherwise than through a stock exchange
or depository, the stamp-duty on each such issue shall be payable by the issuer, at the place
where its registered office is located, on the total market value of the securities so issued at
the rate specified in Schedule I;
(b) when any sale or transfer or reissue of securities for consideration is made otherwise than
through a stock exchange or depository, the stamp-duty on each such sale or transfer or
reissue shall be payable by the seller or transferor or issuer, as the case may be, on the
consideration amount specified in such instrument at the rate specified in Schedule I.
On a combined reading of section 9A and 9B, stamp duty shall be levied on the following types of
transactions:
Nature of transaction Stamp duty Stamp duty to When On
to be be collected
collected by from
Sale of securities through a stock Stock Buyer At the time of Market value
exchange exchange or settlement of of such
clearing transactions securities
corporation
Transfer of securities by a Depository Transferor/ At the time of Consideration
depository, otherwise than on Seller transfer amount
the basis of any transaction on
stock exchange
Issue of securities Depository Issuer At the time of Market value
creation or of securities
any change in specified in
records of a allotment list
depository.
Issue of securities otherwise than Issuer On each issue total market
on stock exchange or depository value of the
securities
Sale or transfer or reissue of seller or on each such Consideration
securities for consideration is transferor or sale or specified in
made otherwise than issuer transfer or such
through a stock exchange or reissue instrument
depository
Transactions arising from tender Stock Offeror (Isuser On successful Market value
offer, open offer or offer for sale exchange/cle in case of completion of of security
or private placements executed aring private offer being
through stock exchange corporation placement) acquired or
soldSale of any securities made Stock Concerned Settlement Rates
through the stock exchange exchange/cle persons day8 specified in
including sale of listed units of aring specified in Schedule I of
any registered pooled corporation section 29 of the Act
arrangements or scheme, or the Act
tripartite repo
Transactions in securities Stock In the case of When Entire sale
reported to a stock exchange exchange/cle sale of security transfer is consideration
aring through stock reported
corporation exchange, by
the buyer of
such security;
Liability to pay stamp duty
The rate of stamp duty shall be as provided in Schedule I. Accordingly, amendments have been made
in Section 29 of the Act providing the details of the person who shall pay the duty. The obligation to
pay stamp duty in case of transactions for sale or transfer of security through a stock exchange or
otherwise is to be borne by the following:
Transaction Duty payable by
In the case of sale of security through stock exchange Buyer of such security
In the case of sale of security otherwise than through a stock Seller of such security
exchange
In the case of transfer of security through a depository Transferor of such security
In the case of transfer of security otherwise than through a stock Transferor of such security
exchange or depository
In the case of issue of security, whether through a stock exchange or Issuer of such security
a depository or otherwise
In the case of any other instrument not specified herein Person making, drawing or
executing such instrument
Market Value
Market value has been defined as well as explained under proviso to Section 21 as under:
Nature of security Market Value will be
Security traded in a stock exchange Trading price
Security transferred by depository but not traded in the stock Consideration mentioned in the
exchange instrument
Security dealt otherwise than in the stock exchange or Consideration mentioned in the
depository instrument
Options in any security Premium paid by buyer
8
Rule 2(1) (l): settlement day means the day on which, - (i) a transaction is settled by a stock exchange or an authorised
clearing corporation, by completing the delivery of funds to the seller and delivery of underlying securities corresponding to
those funds to the buyer; or (ii) it is reported to a stock exchange or a clearing corporation specifying that the transaction in
securities has been carried out provided the security is not held in dematerialised form with any of the depositories; or (iii) an
issue or transfer has been effected in a depository in respect of securities held in dematerialised form which may have to be
later reported to the stock exchange or a clearing corporation.Repo on corporate bonds Interest paid by the borrower
Swap Only first leg of cash flow
Collection of stamp duty
The stock exchange or the authorised clearing corporation and the depository shall be required to
submit to the Government details of the transactions in the manner to be prescribed in the rules.
Centralisation of collection system will also end the tax advantage that investors have been getting for
routing their trade through states with cheaper stamp duty. Further, the amount collected on behalf of
State Government is to be transferred to such State Government determined as under within 3 weeks
of the end of each month:
Particulars State Government eligible to receive stamp duty
Where buyer is located in India Where the residence of buyer is located
Where buyer is located outside India Where the registered office of the trading member
or broker of such buyer is located.
In case no such trading member or broker, where
the registered office of participant is located.
Issue of securities by issuer otherwise than Place where its registered office is located
through a stock exchange or depository,
Any failure to submit or submission of false document or declaration will be punishable with fine of one
lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.
[Section 62A (2)]. Further, Section 62A (1) provides fine payable in case of failure to collect duty or
failure to transfer duty to the State Government within 15 days of expiry of the 3 weeks’ time specified
above, which shall not be less than one lakh rupees, but which may extend up to one per cent. of the
collection or transfer so defaulted.
Further clarifications introduced by Rules
The Rules provide clarity regarding the collection of stamp duty. Who shall collect the stamp duty, on
what amount, from whom and when, are the questions that the rules endeavor to answer. The
provisions regarding collection of stamp duty are structured in the Rules in the following manner:Additionally, the rules also provide clarity in following matters:
1. As discussed above, the market value of options shall be the premium paid on such option by the
buyer. For calculation of the premium paid, the buyer will be under obligation to identify the
premium paid by him and report the same to the collecting agent, being the stock exchange or the
clearing corporation as the case maybe.
2. In case of transactions in securities reported to a stock exchange, the stamp-duty shall be collected
on the entire sale consideration when transfer is reported, even if the consideration is paid in part
or in instalments to be paid in future.
3. In cases where sale consideration is to be treated as market value of an instrument, the
consideration reported to the stock exchange shall be deemed to be the actual sale value.
4. For off-market9 transactions in securities through depositories, the market value for the purpose of
collection of stamp duty shall be the amount of consideration as mentioned in the delivery
instructions slip. Further, in case the consideration is paid in parts, the entire stamp duty shall be
charged when the transfer of securities is affected. The time of payment of consideration becomes
irrelevant here.
5. In case of inter-depository off market transfers the transferee’s depository shall intimate details of
the transfer along with the transferee’s domicile details to the transferor’s depository within 1 day
of transaction being entered into.
9
Rule 2(1)(h): off-market transfer means transfer of securities other than a market transfer6. In case the securities are being transferred pursuant to invocation of pledge, the duty shall be
collected from the pledgee, on market value of securities.
7. Stock exchange shall not collect the stamp-duty on transactions reported by the depositories under
rule 5(6) i.e. dematerialised transfers on which Stamp-duty has already been collected by
Depository.
8. In case of acquisition of shares of minority shareholders by majority shareholders under section 236
of Companies Act, 2013 (18 of 2013), implemented by way of a corporate action, the stamp-duty on
such transfers shall be collected by the depository from the issuer, instead of from the transferor.
9. In the case of transactions which are merely reported to the stock exchange, the stamp-duty shall
be collected by the stock exchange and the reporting intermediaries shall report domicile10 details
of the clients to the stock exchange.
Rates of stamp duty revised
Duty on debentures (Article 27)
The Central Government has the power to levy stamp duty on issue of debentures pursuant to Entry
91 of List I (Union List). State government has power to levy stamp duty on transfer of debentures. In
terms of order bearing S.O. 2189(E) dated September 12, 2008, issued by the Department of Revenue,
Ministry of Finance, it was required that the issuer shall pay the stamp duty on issue of debentures,
being a marketable security transferable (a) by endorsement or by a separate instrument of transfer
(b) by delivery; at the rate of .05% per year of the face value of the debentures, subject to the maximum
of 0.25% or Rs 25 lakh, whichever is lower.
Pursuant to the Finance Act, 2019, Article 27 has been amended to provide ad-valorem rate of duty on
issue of debentures (0.005%) and on transfer and re-issue of debenture (0.0001%). Accordingly, the
rate of stamp duty on debentures will be:
Upon Issuance – Rs 500 for every Rs 1 crore
On Transfer – Rs 10 for every Rs 1 crore
10
Rule 2(1)(d): domicile State means: - (i) the State of the buyer as it appears in the “permanent address” in India on the
settlement day, and in case the same is not available, as it appears in the “correspondence address” in India, as per the records
of stock exchange or clearing corporation or depository ; or (ii) in case the State of buyer is not available in the
“permanent address” or “correspondence address” in India, the State having the registered office of the member,
through whom the trade or transfer was executed, and in case the same is not available, the State having the
registered office of the participant or custodian through whom the trade was effected.As already mentioned above, the exemption available formerly in case of issue of debentures by an
incorporated company or body corporate in terms of a registered mortgage-deed now stands omitted.
Duty on security other than debentures (Article 56A)
State Government has the power to levy stamp duty in case of issue of shares. However, for transfer of
shares, Central Government has the power to levy stamp duty on issue of debentures pursuant to Entry
91 of List I (Union List).
With the insertion of Article 56, the stamp duty in case of securities other than debentures, for eg.
equity shares, preference shares, warrants, has been specified.
Issue will be subject to stamp duty of 0.005%;
Transfer on delivery basis will be subject to 0.15%;
Transfer on non-delivery will be subject to 0.003%
Rate for derivatives, government securities and repo on corporate bonds has also been specified.
The existing duty specified for transfer of shares and debentures, specified in Article 62, has been
omitted, subsequent to the aforesaid insertions.
A snapshot of the applicable rate of stamp duty on shares and debentures at the time of issuance,
transfer and re-issue and the person who shall pay the duty is mentioned herein below:
Shares Debentures Commercial
Listed Unlisted Listed Unlisted Paper
Issuance
-Demat 0.005% 0.005% 0.005% 0.005% 0.005%
Issuer Issuer Issuer Issuer Issuer
-Physical - 0.005% - 0.005% -
Issuer Issuer Issuer Issuer Issuer
Transfer and re-issue (in case of debenture)
-Stock 0.015% 0.015% 0.0001% 0.0001% 0.0001%
exchange Delivery
Basis
0.003%
Non delivery
Buyer Buyer Buyer Buyer Buyer
-Depository 0.015% 0.015% 0.0001% 0.0001% 0.0001%
Delivery
Basis
0.003%
Non delivery
Transferor Transferor Transferor Transferor Transferor
-Otherwise 0.015% 0.015% 0.0001% 0.0001% 0.0001%
(Delivery
basis)
Transferor/S Transferor/Sell Transferor/Sell Transferor/Sell Transferor/Sell
eller er er er erFor the purpose of above clauses, whether a transaction is on delivery basis or otherwise shall be determined by the clearing corporation, at the time of settlement. Further, if the clearing corporations are inter-operable, the transactions entered into by the seller, over all stock exchanges shall be considered to determine if actual delivery will take place in the relevant transaction. Conclusion The amendments to the Act include demat transfer under purview of stamp duty. It is also expected that there shall be an increase in the base of investors for SDIs, by removing the difference between debenture and SDI. Further, a single point of collection for stamp duty would streamline the process altogether, given that transfer by virtue of sale on stock exchange as well as sale through Depository becomes liable to stamp duty. However, the major issue of stamp duty of assignment of receivables still remains unaddressed.
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