Amendments in the Stamp Act: Highlighting the issues and need for further clarification

-Richa Saraf (richa@vinodkothari.com)

The Government had been intending to facilitate ease of doing business and bring in uniformity in the rates of the stamp duty on securities across States and thereby build a pan-India securities market. In this regard, the Central Government, after due deliberations and consultations with the States, through requisite amendments in the Indian Stamp Act, 1899 and Rules made thereunder, has created the legal and institutional mechanism to enable States to collect stamp duty on securities market instruments at one place by one agency (through Stock Exchange or Clearing Corporation authorized by it or by the Depository) on one instrument.

While the relevant provisions of the Finance Act, 2019 amending the Indian Stamp Act, 1899 and the Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 were notified simultaneously on 10th December, 2019 and these were to come into force from 9th January, 2020, due to lockdown, the effective date was later extended to 1st July, 2020 vide notification dated 30th March, 2020 .

In this article, the author tries to highlight two major areas in which there is need for clarity.

Stamp duty in case of issuance of shares:

Article 246 of the Indian Constitution stipulates that Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (“Union List”), and the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (“State List”).

Entry 91 of the Union List provides the Central Government with the power to prescribe the rate of stamp duty on issue and transfer of debentures, transfer of shares and bill of exchange. Further, as per Entry 63 of the State List, the State Government has power to prescribe rate of stamp duty in respect of documents other than those specified in the provisions of List I. Therefore, the power to levy stamp duty on issuance of shares vests with the respective State Governments.

The amended stamp duty rate prescribed by the Finance Act, 2019 stipulates that for issue of security other than debenture, a stamp duty of 0.005% shall be payable . As per Section 2(23A) of Indian Stamp Act, the term “securities” shall include securities as per Section 2(h) of Securities Contracts (Regulation) Act, 1956 , i.e. the following:

(i) Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
(ii) Derivative;
(iii) Units or any other instrument issued by any collective investment scheme to the investors in such schemes;
(iv) Security receipt as defined under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(v) Units or any other such instrument issued to the investors under any mutual fund scheme;
(vi) Government securities;
(vii) Instruments as may be declared by the Central Government;
(viii) Rights or interest in securities.

In accordance with the provisions of the Constitution of India, the Central Government does not have the power to levy stamp duty on issue of shares. However, considering the aforesaid definition, it can be said that the Central Government has prescribed stamp duty rates for the “issue of security other than debenture”, including for “issue of shares”, which shall be chargeable with stamp duty of 0.005%.

This is susceptible to constitutional challenge and may be declared as ultra vires the Constitution.

Stamp Duty on Secured Debentures:

Prior to the Finance Act, 2019, as per erstwhile Article 27 of the Indian Stamp Act, only debentures which qualified as “marketable securities” were liable to be stamped under Article 27 of the Indian Stamp Act. Now, pursuant to the Finance Act, 2019, Article 27 provides an ad-valorem rate of duty of 0.005% on issue of “debentures”, and the term has been defined as follows:

Section 2(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.

Accordingly, it can be inferred that irrespective of the fact that the debentures are marketable or not, stamp duty shall be payable on issuance as well as transfer of debentures.

Another important change to be noted is that earlier w.r.t. mortgage debentures there was a specific exemption that provided that if the mortgage-deed was stamped and registered appropriately (which mortgage would be subject to relevant State stamp legislations), the debentures were exempt from stamp duty. However, pursuant to the Finance Act, 2019, the said exemption has been omitted, which brings us to another major question with respect to payment of stamp duty on issue of secured debentures- whether the security documents viz. deed of hypothecation or mortgage deed will be required to be additionally stamped or not.

In terms of the Finance Act, 2019, Section 4(3) has been inserted in the Indian Stamp Act, which stipulates that in case of any issue, sale or transfer of securities (which again includes debentures), where the duty has been paid on the principal instrument chargeable under Section 9A i.e. instrument chargeable with duty for transactions in stock exchanges and depositories, no stamp duty shall be required to be charged on any other instrument relating to such transaction.

Further, as per Section 9A(3), the State Government cannot charge or collect stamp duty on any note or memorandum or any other document, electronic or otherwise, associated with transactions mentioned in Section 9A(1). This implies that in case secured debentures are being issued in dematerialised form, or are traded over the stock exchange, then the security documents are not required to be separately stamped. In this regard, it is also relevant to cite the case of the Chief Controlling Revenue vs. the Madras Refineries Ltd. AIR 1975 Mad 362 wherein the issue of exemption on payment of stamp duty on incidental documents in case the principal document has already been stamped was discussed at length.

However, there is lack of clarity in case of transactions that do not involve stock exchanges and depositories, such as physical issuances. The question remains whether there will be double incidence of stamp duty- i.e. (i) on issue of debentures; as well as (ii) on mortgage deed or other relevant security documents. While this does not seem to be the intent of the Legislature, a clarification, in this regard, is definitely required.

Our write- up on the Amendments in the Stamp Act can be accessed from the link below:

http://vinodkothari.com/2019/03/single-point-collection-of-stamp-duty/

Our FAQs on the Amendments in the Stamp Act can be accessed from the link below:
http://vinodkothari.com/2019/12/faqs-on-recent-amendments-in-indian-stamp-act-1899/