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Deferral of applicability of amendments in the Indian Stamp Act, 1899

Vinod Kothari & Company

corplaw@vinodkothari.com

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STAMP DUTY IMPLICATIONS ON E-AGREEMENTS

– Ishika Agrawal (corplaw@vinodkothari.com)

I.        Introduction

The way businesses are done, has evolved with the evolution of technology. Now-a-days, business transactions and business contracts are mostly executed electronically in order to save time and expenses. However, this also raises concerns on enforceability of e-agreements in courts and the stamp duty implications on such agreements. In this article, we have tried to broadly discuss the acceptance of e- agreements as evidence in courts and the stamp duty implications on such agreements.

II.     Whether E-agreement is to be stamped?

In India, stamp duty is levied under Indian Stamp Act, 1899 [1](“Stamp Act”) as well as various legislation enacted by different States in India for the levy of stamp duty[2]. Every instrument under which rights are created or transferred needs to be stamped under the specific stamp duty legislation. There is no specific provision in the Stamp Act that specifically deals with electronic records and/or the stamp duty payable on execution thereof.

Section 3 of Stamp Act is the charging section which provides for the levy of stamp duty on specified instruments upon their execution. Relevant provision of section 3 is reproduced below:

3. Instruments chargeable with duty- Subject to the provisions of this Act and the exemptions contained in Schedule I, the following instruments shall be chargeable with duty of the amount indicated in that Schedule as the proper duty therefore respectively, that is to say—

(a) every instrument mentioned in that Schedule which, not having been previously executed by any person, is executed in India on or after the first day of July, 1899;

(b) every bill of exchange payable otherwise than on demand or promissory note drawn or made out of India on or after that day and accepted or paid, or presented for acceptance or payment, or endorsed, transferred or otherwise negotiated, in India; and

(c) every instrument (other than a bill of exchange, or promissory note) mentioned in that Schedule, which, not having been previously executed by any person, is executed out of India on or after that day, relates to any property situate, or to any matter or thing done or to be done, in India and is received in India.

As per the above provision, broadly, two things are required for chargeability of stamp duty:

  • There must be an instrument as mentioned in the schedule I of Stamp Act.
  • The instrument must be executed.

What is Instrument?

The word ‘instrument’ is defined in section 2(14) of Stamp Act. There has been certain ambiguousness in the interpretation of definition of Instrument. Recent amendments have been made in the Stamp Act by Finance Act, 2019 which will come in force from 1st April, 2020.

Prior to the amendment, section 2(14) read as:

2(14) “Instrument includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded”.

However, after the amendment, the scope of the definition given in section 2(14) has been widened by the inclusion of clause (b) and clause (c) which states that:

(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;

The aforesaid amendment is only with respect to the electronic document created for a transaction in a stock exchange or depository, but (a) of the aforesaid section is unaltered. Therefore, it may appear that the term “document” in clause (a) does not include electronic documents – however, such interpretation will not be in spirit of law. The Information Technology Act has already accorded legal recognition to electronic records. Therefore, the word “document” shall be read so as to include electronic documents as well.

Apart from the Indian Stamp Act, many states have their own legislation w.r.t. stamp duty. Majority of state specific stamp duty laws also do not specifically include electronic records within their ambit, however, some state stamp duty laws do refer to electronic records. For instance, Section 2(l) of the Maharashtra Stamp Act, 1958 [3] defining instrument, specifically refers to electronic records. It states that:

instrument includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded, but does not include a bill of exchange, cheque, promissory note, bill of lading, letter of credit, policy of insurance, transfer of share, debenture, proxy and receipt;

Explanation. – The term “document” also includes any electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000.”

This makes clear that, Maharashtra Stamp Act imposes stamp duty on electronic agreements as well. This justifies that even electronic agreements come under the scope of Stamp Act, thus need to be stamped.

What is execution?

Section 2(12) of Stamp Act defines the terms “executed” and “execution”, which is also widened by the recent amendment[4] to take into account, attribution of electronic records. It states that:

“2(12).Executed and execution”- executed and execution used with reference to instruments, mean signed and signature and includes attribution of electronic record within the meaning of section 11 of the Information Technology Act, 2000.”

Thus the execution means putting signature on the instrument by the party to the agreement. Attribution[5] of electronic record will also be treated as execution. It can be concluded from the above definition that, the specific instrument would attract payment of stamp duty upon their execution i.e. when it is signed or bears a signature, even if the execution takes place electronically.

III.   Time and Manner of Stamping

As discussed, an e-agreement is required to be stamped according to State specific stamp laws. Section 3 of the Indian Stamp Act and the stamp legislation of several other States in India specify that an instrument to be chargeable with stamp duty must be “executed”.

Section 17 of Stamp Act stipulates when an instrument has to be stamped. It states that:

17. Instruments executed in India- All instruments chargeable with duty and executed by any person in India shall be stamped before or at the time of execution.

Thus, the stamp duty is to be paid before or at the time of executing the e- agreement and cannot be paid after execution.

However, one may also refer to section 17 of the Maharashtra Stamp Act which allow payment of stamp duty on the next working day following the day of execution.

There are some of the e-agreements such as click wrap agreements where execution does not takes place by the customer. Click-wrap agreements are the agreements where the customer accepts the terms and conditions of the contract by clicking on “OK” or “I agree” or such other similar terms. In case of such e-agreements, while the agreement can be said to be executed by the originator (by way of attribution), there is no signature of the customer which means such agreement does not get executed. Since, execution does not takes place, such agreements need not be stamped. However, another view can be derived that in such click wrap agreements there is acknowledgement of receipt of the electronic record by the customer. Such “acknowledgment” of receipt of electronic record u/s 12 of IT Act may be treated as deemed “execution” [6] by the customer. However, there are no clear provisions in the Stamp Act dealing with eligibility of stamp duty to click-wrap agreements.

As regards the manner of stamping, same can be done in three ways:-

  1. E-stamping: Some states like Maharashtra provides specific provisions for e-stamping. In such case, both the party can digitally sign the document and get it stamped electronically on the same day. For instance, Maharashtra E-Registration and E-Filing Rules, 2013[7] facilitates online payment of stamp duty and registration fees. Rule 10 of the said rules states that:

Rule 10. For online registration, Stamp duty and registration fees shall be paid online to Government of Maharashtra through Government Receipt Accounting System (GRAS) (Virtual Treasury) by electronic transfer of funds or any other mode of payment prescribed by the Government.

Further, as per Rule 3 of The Maharashtra ePayment of Stamp Duty and Refund Rules 2014[8], the stamp duty required to be paid under the act, may be paid online into the Virtual Treasury through Government Revenue and Accounting System (GRAS).

  1. Franking: There is also the concept of franking in some of the states, in which case, document may be printed and stamped by the way of franking before the parties have affixed their signature. For instance, in case of Maharashtra Stamp Act, 1958, section 2(k) which defines “Impressed stamp” also includes impression by franking machine.
  2. Physical Stamping: Where the facility of e-stamping or franking is not available, a print of the e-agreement may be taken and the same may then be adequately stamped with adhesive stamps or impressed stamps before or on the date of execution by the parties as per section 10 of Indian Stamp Act.

However, the liability to pay stamp duty will be upon either of the party to contract as per the agreement entered between them. In the absence of any such agreement, liability to pay stamp duty shall be upon such person as may be determined under section 29 of the Indian Stamp Act.

IV.   Consequences of Non- stamping

Non-payment of stamp duty in respect of documents would attract similar consequences for both physical instruments as well as electronic instruments, unless specific consequences have been prescribed for electronically executed instruments under the respective stamp duty laws.

Inadmissibility as an evidence:

In terms of the Indian Stamp Act and most State stamp duty laws, instruments which are chargeable with stamp duty are inadmissible as evidence in case appropriate stamp duty has not been paid. Section 35 of Indian Stamp Act deals with the consequences of non-stamping of documents. It states that:

  1. Instruments not duly stamped inadmissible in evidence, etc.-No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped.

However, the inappropriately stamped instruments may be admissible as evidence upon payment of applicable duty, along with prescribed penalty.

Other Liability:

Every person who executes or signs, otherwise than as a witness, any instruments which is not duly stamped but the same was chargeable with stamp duty, can be held liable for monetary fines. In case of an intentional evasion of stamp duty, criminal liability can also be imposed.

V.      Conclusion

When all the applicable laws are taken and interpreted in conjunction with one another, it can be understood that, e-agreements being a valid agreements are also liable for stamp duty on execution. However, the same levy will be as per the respective State laws. Where the State legislation provides for the facility of e-stamping, the same shall be availed in order to move towards the goal of paperless economy. Whereas, some States are yet to recognize the importance and validity of e-agreements and e-stamping. It is looked forward on the part of state as well as central government to make specific provisions for e-agreements and e-stamping in order to save time and money and to provide an ease for doing business.

Our write-up on the legal validity of e-agreements can be viewed here.

[1] https://indiacode.nic.in/bitstream/123456789/2331/1/a1899____2.pdf

[2] The Central Government and the State Government (s) have been empowered under the Union List and the State list (respectively) to levy stamp duty on instruments specified therein.

[3] http://igrmaharashtra.gov.in/SB_PUBLICATION/DATA/acts/THE_MAHARASHTRA_STAMP_ACT-2016-revised_sections.pdf

[4] The amendment was brought by the Finance Act, 2019, which by Notification of Ministry of Finance dated 8th January, 2020 are to be effective from the 1st day of April, 2020”

[5] Section 11 of the IT Act provides for attribution of electronic record as follows –

“11. Attribution of electronic records.–An electronic record shall be attributed to the originator–

(a) if it was sent by the originator himself;

(b) by a person who had the authority to act on behalf of the originator in respect of that electronic record; or

(c) by an information system programmed by or on behalf of the originator to operate automatically.”

[6] For instance, Article 7 of the UNCITRAL Model Law on E-Commerce states that where the law requires a signature of a person, that requirement is met in relation to a data message if a method is used to identify that person and to indicate that person’s approval of the information contained in the data message; and that method is as reliable as was appropriate for the purpose for which the data message was generated or communicated, in the light of all the circumstances, including any relevant agreement. This way of putting “signature” is not explicitly recognized in relevant Acts, however, the Courts may take a liberal view in this regard.

[7] http://igrmaharashtra.gov.in/SB_PUBLICATION/DATA/rules/Registration/Maharashtra%20%20e-Registration%20&e-Filing%20Rules,%202013%20.pdf

[8] http://igrmaharashtra.gov.in/SB_PUBLICATION/DATA/rules/STAMPS/4_e-Payment_Rules.pdf

Update 01.02.2019- Key Changes in the Indian Stamp Act

Key changes

  • Definition of bonds will not include debentures;
  • Definition of debenture inserted which includes usance bills, commercial papers, certificate of deposits and other short terms instruments of original or initial maturity of one year or as provided by RBI.
    • Definition under Act, 2013 categorically excludes instruments covered under Chapter III-D of RBI Act, 1939.
  • Definition of instrument now includes a document, electronic or otherwise, created for 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;
  • Definition of security also includes usance bills, commercial papers, certificate of deposits and other short terms instruments of original or initial maturity of one year or as provided by RBI.
  • Section 9A & 9B provides for levy of stamp-duty on following types of transactions:
Nature of transaction Stamp duty to be collected by Stamp duty to be collected from When On
Sale of securities through a stock exchange Stock exchange or clearing corporation Buyer At the time of settlement of transactions Market value of such securities
Transfer of securities by a depository, otherwise than on the basis of any transaction on stock exchange Depository Transferor/ Seller At the time of transfer Consideration amount
Issue of securities Depository Issuer At the time of creation or any change in records of a depository.

 

 

Market value of securities specified in allotment list
Issue of securities otherwise than on stock exchange or depository Issuer On each issue total market value of the securities
Sale or transfer or reissue of securities for consideration is made otherwise than

through a stock exchange or depository

seller or transferor or issuer on each such sale or transfer or reissue Consideration specified in such instrument

 

  • Rate 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.
  • 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 exchange Consideration mentioned in the instrument.
Security dealt otherwise than in the stock exchange or depository Consideration mentioned in the instrument
Options in any security Premium paid by buyer
Repo on corporate bonds Interest paid by the borrower
Swap Only first leg of cash flow

 

  • The stock exchange or the authorised clearing corporation and the depository shall submit to the Government details of the transactions in the manner to be prescribed in the rules.
    • 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)]
  • The amounts collected on behalf of State Government 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 through a stock exchange or depository, Place where its registered office is located

 

  • 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.

Major changes in Schedule I

  • Duty on debentures (Article 27)
    • Central Government has the power to levy stamp duty on issue of debentures pursuant to Entry 91 of List I (Union List).
    • 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%).
    • The exemption in case of issue of debentures by an incorporated company or body corporate in terms of a registered mortgage-deed stands omitted.
  • Duty on security other than debentures (Article 56A)
    • equity shares, preference shares, warrants.
    • 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 also specified.

Our detailed article may be read here.