The 2019 Indian budget was an interim budget, on account of the national elections scheduled for this year. The amendments proposed by the Finance Act of 2019[1] (“Finance Act”) were therefore limited in nature. A notable exception was the amendments to Indian stamp duty provisions under the Indian Stamp Act, 1899 (“Stamp Act”). The primary objective of these amendments was to streamline the levy and administration of stamp duty on transactions involving securities.[2]

Key amendments

Some key amendments are as follows:

•       Stamp duty on transfer of securities (in dematerialized & physical form) – Under the extant regime, the transfer of dematerialized securities is exempt from stamp duty, both for both listed and unlisted shares.[3] In comparison, transfer of physical shares is stampable. This discrepancy is proposed to be done away with by the Finance Act[4], although the transfer of securities from a person to a depository or from a depository to a beneficial owner shall continue to be exempt.[5] Similarly, the exemption previously applicable to transfer of units in mutual funds has been done away with, and a transfer of beneficial ownership in mutual funds will now be stampable.

The existing stamp duty rate of 0.25% applicable to the transfer of physical shares is proposed to be omitted by the Finance Act[6], and all securities will be subject to the revised rates further detailed below.

•       Principal instrument in case of stock exchange or depository-based transactions – It is proposed that the instruments specified as stampable instruments under the proposed section 9A shall be the principal instrument for the purposes of section 4 of the Stamp Act. Under the current regime, the record of a transaction is considered stampable under the Stamp Act and state stamp legislations – consequently, broker communications in a written note form are stampable, but no stamp tax applies in the absence of a written note or communication. This discrepancy should now stand resolved with clarity on the principal instrument to be stampable.

•        Streamlined collection mechanism – The collection of stamp duty is proposed to be by the stock exchange in a uniform manner[7], and the proposed amendments specify who will be responsible for paying stamp duty in different situations. For example, the buyer shall pay in case of sale of security through the stock exchange, whereas the seller shall pay for sales off the exchange.[8]

•          Revised stamp duty rates – The proposed stamp duty rates[9] for securities are as follows:

(a)      Issuance of securities: 0.005% of the market value of such securities. It is pertinent to note that no stamp duty is chargeable on securities by the Government.[10]
(b)      Transfer of securities for consideration: 0.015% if on delivery basis and 0.003% if on non-delivery basis, of the consideration amount.[11]
(c)       Derivatives: 0.0001% to 0.003% depending on the nature of the derivative.
(d)      Repo on corporate bonds: 0.00001%

Some observations

•        Transfers without consideration – The new rates applicable to transfer of securities are only applicable to transfers for consideration.[12] No specific charge seems to have been levied on transfers without consideration. Such transfers should then be exempt (for physical as well as dematerialized securities), in the absence of a separate conveyance such as a gift or trust deed.

•        Enforceability – As per the Constitutional scheme of taxation, the Central Government is only entitled to prescribe rates of stamp duty on ‘transfer of shares’ and not on ‘issuance of shares’.[13] The proposed stamp duty on issuance of securities would need to be evaluated from this perspective, particularly if any states decide to not accept the provision.

•      Effective date – Although most of the amendments contained in the Finance Act are effective from 1st April, 2019 (unless otherwise specified),[14] the proposed amendments to the Stamp Act contained in chapter IV of the Finance Act are yet to come into force.[15] We would need to see if there is an impact under the upcoming budget.

Authors:
Shreya Rao, Partner
Shweta Mallya, Associate

End Notes:
[1] Part I of Chapter IV of the Finance Act, 2019.
[2] Clause 13 of Statement of Objects and Reasons to the Finance Act, 2019.
[3] Sections 8(A)(c)(ii) and 8(A)(c)(iii) of the Indian Stamp Act, 1899.
[4] Section 14 of the Finance Act, 2019.
[5] Section 14 of the Finance Act, 2019.
[6] Section 21(vi) of the Finance Act, 2019.
[7] Section 15 of the Finance Act, 2019.
[8] Section 17 of the Finance Act, 2019.
[9] Section 21(v) of the Finance Act, 2019.
[10] Section 15 read with section 21(v) of the Finance Act, 2019.
[11] Section 15 read with section 21(v) of the Finance Act, 2019.
[12] Section 15 and section 21 of the Finance Act, 2019.
[13] Article 246 read with Entry 91 of List I of the Seventh Schedule of the Constitution of India.
[14] Section 1(2) of the Finance Act, 2019.
[15] Section 11 of the Finance Act, 2019.