The Constitution of India, by way of the Seventh Schedule, empowers the Union Government and the State Governments to legislate provisions regarding stamp duties. Under Article 246, stamp duties on documents specified in Entry 91 of List I of the Seventh Schedule (‘Union List’) (viz. bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts) are levied by the Union. Stamp duties on documents other than those mentioned above are levied and collected by the States by virtue of the legislative entry 63 in List II of the Seventh Schedule (‘State List’). Provisions other than those relating to rates of duty (which fall within the scope the Union List and the State List) fall within the legislative power of both the Union and the States under Entry 44 of the Concurrent List in the Seventh Schedule of the Constitution.
The Finance Bill, 2019 (‘Finance Bill’) passed by both the Houses of the Parliament on February 12, 2019 has, inter alia, proposed certain amendments to the Indian Stamp Act, 1899 (‘Stamp Act’) with a view to streamline levy of stamp duties on transactions involving financial securities. The Finance Bill will be passed once it receives Presidential asset and is published in the Official Gazette. Some of the key changes proposed by the Finance Bill in this regard have been highlighted below:
(a) ‘Debentures’ are proposed to be excluded from the definition of ‘bonds’ under the Stamp Act and a separate definition has been proposed to be introduced. The newly proposed definition includes any instrument issued by a company evidencing a debt (like compulsorily convertible debentures, optionally convertible debentures, etc.), and short-term instruments such as certificates of deposit, commercial usance bill and commercial papers.
Under the existing Stamp Act, only debentures which were ‘marketable securities’ were liable to be stamped under Article 27 of Schedule I to the Stamp Act. The Finance Bill proposes to delete the reference to ‘marketable securities’ and consequently, all debentures (whether marketable or not) will become liable to be stamped.
(b) The existing Stamp Act provided that the stamp duty on issue of Debentures was 0.05% per year of the face value of the debentures up to 0.25%, subject to a cap of INR 25 lakhs (approx. US$ 35,300). The rate of stamp duty is now proposed to be changed to 0.005% with no cap. Whether the stamp duty will be calculated on the face value of the Debentures or whether the premium (if any) at which Debentures are issued will also be taken into consideration is currently unclear.
(c) A key change for several banks and financial institutions is the proposed removal of the exemption from payment of stamp duty for debentures issued under a mortgage deed. As a result, even if Debentures are issued in terms of a registered mortgage-deed which has been duly stamped, such Debentures would still be liable to be stamped as per the amended rates proposed under Article 27 of the Stamp Act.
(d) Stamp duty of 0.0001% is proposed to be levied on the transfer of Debentures as well. As ‘transfer of Debentures’ is not a specified entry in the Union List, the same would fall under the State List empowering the State Governments to prescribe stamp duty rates for such transfers. Therefore, it remains to be seen whether this provision would actually be enforceable.
2. Securities: A new definition of ‘securities’ has been proposed to be introduced under Section 23A of the Stamp Act, which includes, inter alia, ‘securities’ as defined under the Securities Contracts (Regulation) Act, 1956, derivatives, repo on corporate bonds, etc. (‘Security(ies)’).
The stamp duty rates proposed for Securities are as follows:
(a) issuance of Securities (other than Debentures): 0.005%. Please note that only rates of stamp duty payable on ‘transfer of shares’ is covered under the Union List, and therefore, State Governments are entitled to prescribe rates of stamp duty payable on issuance of shares. Therefore, it remains to be seen whether the proposed stamp duty rates would actually be enforceable); [Union list deals with only ‘issuance of debentures’ and not transfer of debentures – hence the deletion.]
(b) transfer of Securities (other than Debentures): 0.015% (if on delivery basis) and 0.003% (if on non-delivery basis);
(c) derivatives: 0.0001% to 0.003% depending on the nature of the derivative; and
(d) repo on corporate bonds – 0.00001%.
Prior to the proposed amendment, derivatives and repo transactions were not expressly included in Schedule I. However, no stamp duty is chargeable on the issuance of Securities issued by the Government.
3. Removal of Exemption on Stamp Duty on Transfer in Dematerialized Form: The Finance Bill seeks to amend Section 8A of the Stamp Act such that the exemption available for transfer of beneficial ownership of Securities and mutual fund units is proposed to be removed. Such waiver is now proposed to be made applicable only to transfers of Securities from a person to a depository or from a depository to a beneficial owner. Please note that the Central Government is entitled to prescribe rates of stamp duty payable only on ‘transfer of shares’ but not on ‘transfer of debentures’. Therefore, it remains to be seen whether the proposed removal of exemption in case of transfer of Debentures in dematerialized form would actually be enforceable.
4. Collection of Stamp Duty for Securities’ Transfer in Dematerialised Form: The proposed introduction of a separate regime for collection of stamp duty on Securities transactions in dematerialized form is a key change for stock exchanges, clearing corporations and depositories. A new section, Section 9A, is proposed to be introduced under which the stamp duty in case of sale, transfer and issue of Securities, must be collected on behalf of the State Government through the aforementioned agencies.
(a) In cases of transfer of Securities through the stock exchange, the stock exchange or a clearing house authorised by it will be liable to collect stamp duty from the buyer of the Securities at the time of settlement of the transaction.
(b) In cases of transfer of Securities in dematerialized form (other than through stock exchanges), the concerned depository will be liable to collect stamp duty from the transferor at the time of the transfer.
(c) In cases of issue of Securities in dematerialized form which leads to a change or a creation in the records of the depository concerned, the concerned depository will be liable to collect stamp duty from the issuer.
If the agencies named above do not collect the full stamp duty and transfer it to the relevant State Government within the prescribed time, these agencies will be required to pay a fine of INR 1 lakh (approx. US$ 1400), upto a cap of 1% of the amount that should have been so collected and transferred.
5. Responsible Party: Section 29 of the Stamp Act is proposed to be further amended to set out the responsibility of the party who will be liable to bear the stamp duty, in the absence of an agreement to the contrary.
|Sr. No.||Particulars of Transaction||Onus of Stamp Duty Payment|
|1.||Sale of Security through stock exchange||Buyer of Security|
|2.||Sale of Security otherwise than through a stock exchange||Seller of Security|
|3.||Transfer of security through a depository||Transferor of Security|
|4.||Transfer of security otherwise than through a stock exchange or depository||Transferor of Security|
|5.||Issue of security, whether through a stock exchange or a depository or otherwise||Issuer of Security|
|6.||Any other instrument not specified under Section 29 of the Stamp Act||Person making, drawing or executing such instrument|
The introduction of Section 9A has added a new twist to the tale for secondary transactions. Typically, in secondary transactions, the transferee bears the stamp duty liability on the transfer. But, the proposed addition of Section 9A would mean that, even if the parties have contractually agreed for the transferee to bear the stamp duty. the transferor may have to pay the stamp duty to the relevant agency and separately collect the amount from the transferee.
6. Disclosure of Securities Transactions: Another key change proposed is that the Central Government may, by way of rules, call upon any of the aforementioned agencies to furnish details of Securities transactions. If any such agency does not do so, it will be liable to pay a fine of INR 1 lakh (approx. US$ 1400) per day of default upto INR 1 crore (approx. US$ 14,000).
These amendments have been proposed pursuant to the Finance Bill, and it would be relevant to examine the actual amendments that are introduced to the Stamp Act once the Finance Act is passed.