The Finance Act came into effect on 1st day of April, 2019 but the amendments to Indian Stamp Act as mentioned in Part I of Chapter IV of the Finance Act, wherein the Central Government is empowered to enforce the amendments as and when it may deem fit weren’t notified until December 10, 2019 , when the Ministry of Finance, Government of India vide notification appointed 9th day of January, 2020, as the date on which the provisions of said chapter shall come into force. Further, the Central Government (Ministry of Finance) vide notification dated March 30, 2020 has deferred the effective date of amendments in Indian Stamp Act to 01st day of July, 2020.
With these amendments, the Central Government has sought to streamline the process of levying and collection of Stamp Duty on the Instruments related to issue or transfer of securities, by all the States through common agencies i.e. Stock Exchanges or Clearing Corporations or Depositories, as the case may be.
The Indian Stamp Act, levies stamp duty on the Instrument not on transactions and this fact has been upheld by many courts, since the Finance Act aims to levy stamp duty on securities issued, sold , transferred etc., through electronic means , therefore the issue of the matter was, what will be the instrument in such cases on which the stamp duty will be levied and collected. Considering this fact in mind, the Legislators have considered Allotment List and Clearing List amongst other things, as Instruments for the purpose of adjudication of stamp duty which was not expressly mentioned in the Act until the amendments came into effect.
The Finance Act has widened the existing definition of ‘instrument’ under the Act by including in its ambit, 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.
Currently the term “Securities” under the Stamp Act has been used only in context of Section 8A of Indian Stamp Act. The Finance Act has inserted the definition of the term ‘Securities’ under the Indian Stamp Act for the purpose of the entire Act. As opposed to generally accepted definition of the term, the Finance Act has extended the definition to include in addition to securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (‘SCRA’), the following additional instruments
- a "derivative" as defined in clause (a) of section 45U of the Reserve Bank of India Act, 1934;
- 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
- any other instrument declared by the Central Government, by notification in the Official Gazette, to be securities for the purposes of this Act;
Here it is also important to highlight the other side of the coin as there are some instruments on which there is no clarity yet whether these would be called as ‘Security’ under SCRA such as Warrants, Units issued by Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (InvIts) and Alternate Investment Funds (AIFs) governed by Securities Exchange Board of India (SEBI) however, these are recognized by Reserve Bank of India as ‘Non-Debt Instruments’ under the Foreign Exchange Management (Non Debt Instruments) Rules, 2019 (FDI Rules).
Further under the SCRA’s definition of securities, derivates are also covered which were excluded from purview of the Stamp Duty upto these amendments in the Indian Stamp Act. As per SCRA, Derivatives includes
- A security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;
- A contract which derives its value from the prices, or index of prices, of Underlying Securities;
- Commodity derivatives; and
- Such other Instruments as may be declared by the Central Government to be Derivatives.
As a result, Futures and Options (in equity and commodity) and other kind of security or contract which derives its value from debt, share or loan or index of prices shall also be subject to stamp duty.
Further, the Amendment Act also covers other kind of ‘Derivates’ as defined under Section 45U(a) of the Reserve Bank of India, 1934 (‘RBI Act’). Derivatives as defined under the RBI Act means “Instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called "underlying"), or a combination of more than one of them and includes interest rate swaps, forward rate agreements, foreign currency swaps, foreign currency-rupee swaps, foreign currency options, foreign currency-rupee options or such other instruments as may be specified by the Bank from time to time.”
These above derivates as per the RBI Act refer to the transactions to hedge – specifically reduce or extinguish an existing identified risk on an ongoing basis during the life of the derivative transaction – or for transformation of risk exposure, as specifically permitted by RBI. Derivatives serve a useful risk-management purpose for both financial and non-financial firms. It enables transfer of various financial risks to entities who are more willing or better suited to take or manage them. Participants of this market can broadly be classified into two functional categories, namely, market-makers and users. Recently, the RBI has also introduced Rupees Interest Rate Derivates (Reserve Bank) Directions, 2019. Now these kinds of derivates are also covered and subjected to Stamp Duty as per the amendments made in the Indian Stamp Act.
The definition of the securities also includes 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. Now these are also subject to the Stamp Duty under the amendments made in the Indian Stamp Act which were earlier out of the purview of the Act. The RBI has in place Master Directions to regulate the money market instruments.
The Finance Act has also inserted the definition of the term ‘ debenture’ in Indian Stamp Act to include the following:
- 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;
- bonds in the nature of debenture issued by any incorporated company or body corporate;
- 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;
- securitised debt instruments; and
- any other debt instruments specified by the Securities and Exchange Board of India from time to time;
The revised schedule to the Stamp Act also seeks to levy stamp duty on all types of debentures, whether they are listed or unlisted. Before the Finance Act, only debentures which are marketable were subject to stamp duty. Further the revised schedule to the Stamp Act has a specific article for Debentures irrespective of the fact that debentures are also covered under the definition of securities.
The Finance Act has replaced the term ‘value’ with ‘Market Value’ for the purpose of ascertainment of stamp duty in respect of marketable or other security. The term ‘value’ has different interpretations which lead to various litigations, as one contention was that the value of the stamp duty is the value of the instrument but other contention was that value means market value of the instrument. With the definition of the new term ‘market value’, there will not be any kind of confusion on determining the value of the instrument.
As per the Amended Stamp Act, the "Market Value", in relation to an instrument through which—
(a) any security is traded in a stock exchange, means the price at which it is so traded;
(b) any security which is transferred through a depository but not traded in the stock exchange, means the price or the consideration mentioned in such instrument;
(c) any security is dealt otherwise than in the stock exchange or depository, means the price or consideration mentioned in such instrument;”
On the basis of above definition, the Market Value will be the price at which any security is traded on a Stock Exchange whereas any security which is not so traded on the stock exchange but traded through Depository the Market Value of such security shall be price or consideration mentioned in the instrument. In all other cases which mean security is sold through physical mode like endorsement, transfer through certificates but not through any Stock exchange or Depository, the Market Value will be the price or consideration mentioned in the instrument.
From the above, it looks very sorted and simple to determine the market value of the securities being traded, issued and transferred. But the above definition may change the current practice of levying the stamp duty on the securities. In case of any allotment of securities by the Listed Entity, by any means such as Private Placement, ESOPs, Bonus Issue, Rights Issues, Further Issue of Securities, etc., the transaction will always be executed through Depository and not through Stock Exchange which means the Stamp Duty shall be calculated on the basis of consideration or Issue Price involved in such allotment of securities irrespective of the fact the consideration is below or above the value available at the Stock Exchange whereas in the existing framework, the Value of the Security is the price available on the Stock Exchange irrespective of the Issue Price. As explained hereinabove the stamp duty will be collected from the Issuer before making changes in the records of the Depository and as per the amended provisions, the duty shall be determined on the value as mentioned in the Allotment List i.e. the Issue Price whether the securities are listed or not. However, in case of any offer whether tender offer, open offer, offer for sale or private placement offer, the duty will be collected from the Offeror at the Offer Price only after the offer is successfully completed. With these amendments, we can say that the concept of levying duty is changed from the value of issue of securities to the consideration/ issue price of the securities specifically in case of listed entities in matter related to issuance of securities and the reason of that amendments may be other laws especially Income Tax Act and Companies Act which require an entity to issue securities on fair market value.
The above just discussed concept is also followed in case of transfer of securities through physical mode and through Depository where the duty will be levied only on consideration mentioned in the instrument while in case of transfer of securities through Stock Exchange, the duty will be levied on the price it is so traded.
The Finance Act has also clarified that no stamp duty shall be levied on creation or destruction of securities in case of Stock Splits, stock consolidation, mergers & acquisitions or such other similar corporate actions if it does not involve change in beneficial ownership. Here it is to be noted that issue of securities pursuant to any scheme of merger and amalgamation will continue to attract Stamp Duty.
The existing provisions of section 4 of the Act have been amended by including sub section (3) which is as follows:
“(3) Notwithstanding anything contained in sub-sections (1) and (2), in the case of any issue, sale or transfer of securities, the instrument on which stamp-duty is chargeable under section 9A shall be the principal instrument for the purpose of this section and no stamp-duty shall be charged on any other instruments relating to any such transaction.”
From the clause, it is inferred that in case there are several instruments being executed under one transaction or agreement wherein any Security is also issued, sold or transferred then, the principal instrument for the purpose of levying duty shall be such Security and no other instruments mentioned in such transaction or agreement shall be subject to Stamp Duty.
Before the notification of provisions of Part 1 of Chapter IV of the Finance Act, transfer of securities in demat was not subject to any stamp duty. The Finance Act, seeks to end the relaxations given to such transfer and has provided for levy and collection of stamp duty on transfer of securities in demat or electronic form. The said amendment seeks to end the biggest benefit available on dematerialization of any security.
The Finance Act, seeks to completely overhaul the process of levying and collecting stamp duty on instruments related to issuance, sale and transfer of securities in electronic form i.e. in demat form. The key changes made are outlined below:
- Sale of Securities made through Stock Exchange
- Transfer of Securities made through Depositories
- Issue of Securities which changes or creates the records of the Depository
Any sale of securities (delivery based or otherwise) through stock exchange including but not limited to tender offer, open offer or offer for sale, private placements , shall be subject to , stamp duty, which shall be levied on the market value of the securities so traded on the stock exchanges at the time of settlement of transaction and shall be collected from the Buyer by the concerned stock exchange or clearing house authorized by it, on behalf of the state government.
All off-market transactions where any security either listed or unlisted is transferred (delivery based or otherwise) through the Depository including over the counter trades occurring in dematerialized or electronic form shall be subject to stamp duty, which shall be collected by the Depository from the Transferor/seller on the consideration amount mentioned on the delivery instruction slip before the execution of transfer. However, in case of invocation of pledge, the stamp duty shall be collected from the Pledgee i.e. bankers/ lenders.
Stamp duty on issuance of securities through Depository mode where these are listed or unlisted shall be levied on the allotment list and will be collected from the Issuer before making any changes in the register of beneficial ownership maintained by the Depository on the total price or consideration mentioned in the allotment list.
Exception to the above:
- In case of Tender Offer or Open Offer or Offer for Sale through Depository, the stamp duty shall be collected from the Offeror on the Offer Price of the securities.
- In case of acquisition of shares of Minority Shareholder by Majority Shareholder under section 236 of the Companies Act, 2013 through Depository, the Stamp Duty shall be collected from the Issuer instead from Transferor.
The Finance Act doesn’t aim to change the manner in which stamp duty is levied and collected in case of issuance of any securities other than through stock exchange or depository but has put to rest on one of the most controversial issue of place of levying the stamp duty specifically in case of shares certificate , where there is always a dilemma to pay stamp duty at the rate prevailing in the state where registered office of the Issuer is situated or the state where instrument is executed. This very issue is now resolved by levying the duty on the market value of the securities which shall be payable by the Issuer in the State where its registered office is located. For this purpose, market value shall mean the price or consideration mentioned in the instrument.
In case of sale, transfer or re-issue of securities for consideration other than through stock exchange or depository, the Finance Act clarifies that stamp duty shall be paid by the Seller, Transferor or Issuer, respectively.
In both (d) and (e), the stamp duty payable shall be paid and collected in manner presently prevailing in the respective states. The Finance Act doesn’t provide any new mechanism in this regard.
A summarized position as to liability of payment of duty, amount on which duty is payable along with time of payment of duty is outlined below
|Nature of transaction||Duty by whom payable||Duty payable on||Time|
Sale of security through stock exchanges
|Buyer||Price at which it is so traded||Settlement of transactions|
Transfer of security through a depository
|Transferor||Consideration specified in the instrument||Before executing transfer|
Transfer of security otherwise than through a stock exchange/ depository
|Transferor||Consideration specified in the instrument||Before executing transfer|
Issue of security through a stock exchange/ depository or otherwise
|Issuer||Consideration or Issue Price||At the time of issue or change in the records of depository|
Issue of security otherwise than through a stock exchange/ depository
|Issuer||Consideration specified in the instrument||At the time of issue of securities|
Offer for sale, private placement, tender offer or open offer through stock exchange
|Offeror||Offer price||Once offer is completed|
Offer for sale, private placement, tender offer or open offer through Depository
|Offeror||Offer price||Once offer is completed|
The Finance Act has also amended the Schedule I of the Stamp Act, to change some existing duties and provides for new duties in case of transactions related sale or transfer.
Some of key stamp duty rates are outlined below:
|Issue of debenture;||0.005%|
|Transfer and re-issue of debentures||0.0001%|
|Issue of security other than debenture||0.005%|
|Transfer of security other than debenture on delivery basis||0.015%|
|Transfer of security other than debenture on non-delivery basis||0.003%|
|Repo on corporate bonds||0.00001%|
Now, as per the Amended Stamp Act, the duty to levy and collect Stamp Duty is now vested with the Stock Exchanges, Clearing Corporations and Depositories when any security is being sold, transferred or issued through these platforms. As per sub-section (3) of Section 9A of the Indian Stamp Act, w.e.f. 09th January 2020, no State Government shall charge or collect Stamp Duty on any Security being sold, transferred or issued through the aforementioned platforms.
The stock exchange or a clearing corporation authorised by it or the depository, as the case may be, shall, within three weeks of the end of each month and in accordance with the rules made in this behalf by the Central Government, in consultation with the State Government, transfer the stamp-duty collected under this section to the State Government where the residence of the buyer is located and in case the buyer is located outside India, to the State Government having the registered office of the trading member or broker of such buyer and in case where there is no such trading member of the buyer, to the State Government having the registered office of the participant.
The Central Government has notified Indian Stamp (Collection of stamp duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 (‘Stamp Rules’) to provide the manner in which stamp duty shall be levied and collected by such agencies and then transferred to the concerned state governments.
The Stock Exchanges, Clearing Corporation or Depository (collectively referred as ‘Collecting Agent’), shall not utilize the Stamp Duty so collected for any other purpose and it shall be transferred to the Concerned State Government along with the interest thereon. Thereafter, the Collecting Agent shall file a monthly return to the Concerned State Government mentioning all the information related to stamp duty collected, details of transfer of stamp duty, details of defaulters. The Central Government has provided a format of Return of Stamp Duty Collected (Monthly/Yearly).
From the above, it is inferred that the existing process of collection of stamp duty will undergo a sea change and the rate of various type of security mentioned in revised Schedule-I has been made universal across India which will curtail the scope for rate shopping and evasion of duty.Now, this practice will be stopped as the Uniform rate is notified across all India and share the stamp duty so collected amongst the states where the buyer/ allottees resides.
Since the stamp duty on transactions related to sale or transfer of securities are carried on electronically through stock exchanges or depositories, the Finance Act also provides for manner of determination of state eligible to receive the stamp duty.
After collection of Stamp Duty from the respective persons (Buyer, Transferor or Issuer) by the Stock Exchanges, Clearing Corporation or Depository (collectively referred as ‘Collecting Agent’), the Collecting Agent shall transfer the stamp duty so collected to the account specified by the concerned State Government after deducting 0.2% of the total collection as its charges/ fees. Here, the Concerned State Government means where the Buyer of the securities resides. As per the Stamp Rules , the term ‘domicile state’ is used for the purpose of transferring the stamp duty to the concerned state which shall mean:
- state of the buyer appearing as ‘Permanent address’ in India in the records of the Collecting Agent and if the same is not available, then the ‘Correspondence address’ in India.
- In the absence of both the addresses in India, the concerned State eligible for the Stamp Duty shall be the State where the registered office of the Intermediary is located (i.e. Broker, Clearing Member, Depository, Custodian, etc. through which trade is executed).
The aforesaid clarity with respect to the State eligible to receive stamp duty, will also end the discretionary practices being followed by different companies while issuing securities in demat. Currently some Companies including listed entities adjudicate the stamp duty on issuance of the shares in demat in the state where the Registrar and Share Transfer Agent (RTA) is situated on the basis that the Instrument by which shares credited to the allottees are issued by their RTA and therefore Stamp Duty as per law prevailing in that state should be levied and while others were paying stamp duty as per the place of registered officer of the issuing company.
The major change in terms of the state eligible to receive stamp duty is with respect to issuance of securities in demat. Currently such stamp duty is paid to the state, either where the registered office of issuer is situated or where the RTA is located but with the amendments, the stamp duty will be distributed by the Depositories based on the domicile state of the allottees. This seems to be a major shift in manner of determination of state eligible to receive the stamp duty and may also lead to loss of duty for some states like Maharashtra.
Further, the Act has also made clear and fixed the duty on one of the parties to pay the stamp duty based upon the type of transactions being entered into:
With the amendments in the Stamp Act, the Central Government aims to bring sale or transfer of securities through electronic mode, within the ambit of stamp duty and create additional revenue to the State Governments and also lay at rest certain ambiguities in the current law. Single rate and centralized system aims to streamline the entire process, reduce the cost of collection and plug revenue leakage. However, this will lead to increase in cost of trading in securities as transactions specifically on stock exchanges are already subject to securities transaction tax. What needs to be seen is how well the collection mechanism is implemented by the Collecting agents specifically in case of stamp duty on trade on stock exchanges.
It is also important to bring the State Governments on board with respect to stamp duty rates on issuance of securities, the subject matter of which falls under List II of the Constitution of India and on which the state governments are only empowered to legislate.