[By Saksham Shrivastav and Urvisha Kesharwani]
The authors are students at the National University of Study and Research in Law, Ranchi.
To retrench the needless overlaps of liable stamp duties in the earlier regime and provide a more uniform and centralized collection system, the Government of India (“Government”) last year introduced certain legislative amendments. The amendments brought in by Chapter IV of the Finance Act 2019 (“Amendment”) to the Indian Stamp Act, 1899 (“Stamp Act”) along with the Indian Stamp (Collection of Stamp Duty through Stock Exchanges, Clearing Corporations, and Depositories) Rules 2019 (“Rules”) finally came into force from July 1, 2020. However, this Amendment comes into effect after facing several delays as it was originally supposed to be implemented from January 9, this year.
Since the power of imposing stamp duties falls under all the three lists depending upon the nature of the transaction, it allows different states to levy different stamp duty rates for the same instrument. Thereby in the prior regime, multiple incidences of duty were allowed, this not only caused varying rates for the same instrument but also raised the transaction cost in the securities market thereby impeding capital formation. Through these reforms, the Government aims to create a more cost-effective, zero-evasion centralized mechanism by harboring a uniform approach and curbing down the unnecessary transaction costs. This is not only expected to enhance capital formation but also minimize jurisdictional disputes. Following is an analysis of some of the major reforms that have been introduced in the new regime.
a) Streamlining the Definitions
The Amendment has brought about changes in some existing definitions and has introduced some new definitions in order to keep up with the ever-changing securities market. Following are some of the key inclusions:
- Instrument: The definition of ‘Instrument’ has further been broadened by the Amendment and now encompasses, 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.
- Securities: A more inclusive definition for ‘securities’ has also been introduced. The prior exposition of the term ‘securities’ given under section 8A of the Stamp Act was drawn from the definition in the Securities Contract (Regulation) Act, 1956 (“SCRA”) for the purposes of that section. The Amendment has introduced the definition of ‘securities’ which now includes:
- Securities as defined in clause (h) of section 2 of the SCRA;
- ‘Derivative’ as defined under the Reserve Bank of India Act, 1934;
- Certificate of deposit, commercial usance bill, commercial paper, repo on corporate bonds and such other debt instrument of original or initial maturity up to one year; and
- Any other instrument declared by the Central Government, by notification in the official gazette.
It is a, however, essential to bring to attention the fact that despite the amendment, there remain several instruments that lack clarity on whether they would come under ‘securities’. These include Warrants, Units issued by Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (InvIts), and Alternate Investment Funds (AIFs) governed by the Securities Exchange Board of India (SEBI), under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (FDI Rules), these were categorized by the RBI as ‘Non-Debt Instruments’.
- Debentures: Under the previous regime, the term ‘debentures’ was not defined under the Stamp Act and only ‘debentures’ that came under marketable securities were stamped as per Article 27 of the Stamp Act. Further, the amendment has also excluded the ‘debentures’ from the definition of ‘bonds’ thereby, preventing any state government from charging stamp duty on the issuance of debentures under the classification of bonds.
- Market Value: Prior to the Amendment the stamp duty was collected on the value of the security according to the average price or the value thereof as on the date of the instrument. However, now the stamp duty will be calculated on the ‘market value’ of security to ensure that the stamp duty is levied on the price it is transacted rather than the average price of the day. According to section 12(h) of the Amendment ‘market value’ is defined as, in relation to an instrument through which:
- Any security is traded in a stock exchange, means the price at which it is so traded;
- Any security that is transferred through a depository but not traded in the stock exchange means the price or the consideration mentioned in such instrument;
- Any security dealt otherwise than in the stock exchange or depository means the price or consideration mentioned in such an instrument.
b) Integrating the Stamp Duty Laws
The main purpose of this Amendment was to bring uniformity in the imposition of stamp duty across the country. With the insertion of sections 9A and 9B in the Stamp Act, the provisions relating to the issue, sale, or transfer of securities have been consolidated. This has been the most significant of all the changes since earlier, different state governments would have different rates on the same instrument, which lead to ‘rate shopping’. These rate differences were heavily exploited by the companies, which resulted in widespread rate shopping, thereby causing loss to the exchequer.
Apart from this, uniform stamp duty rates have been prescribed for issuance and transfer of securities. The stamp duty will now be paid by only either the buyer or the seller. For example, according to Section 9A (read with the Rules), in the case of sale of securities through stock-exchange, the stamp duty will be collected only from the buyer and in the case of sale of security otherwise than through a stock-exchange or depository, from only the seller. This will remove the double imposition of stamp duty on buyer and seller, which was happening under the previous regime.
c) Centralized Collection Mechanism
One of the key changes brought by the Amendment is the introduction of a Centralised Collection Mechanism (“CCM”). Under CCM the stamp duty on securities will be collected on behalf of the state government by the authorized stock exchanges, clearing corporation, or depositories. The stamp duty collected will be transferred to the state government where the buyer resides at the end of each month after deduction of facilitation charges imposed by such collecting agency. In case the buyer is located outside India, the stamp duty will be collected by the state government having the registered office of the trading member or broker of such buyer, and in a case where there is no such trading member of the buyer, by the state government has the registered office of the participant. To further prevent multiple incidences of taxation, the state government is not allowed to collect stamp duty on any secondary record of transaction associated with a transaction on which the depository/stock exchange has been authorized to collect the stamp duty.
However, it is unclear whether the debentures issued by the private companies, on which SCRA would not be applicable, would be included under the definition of ‘securities’ for the purpose of CCM since the Amendment’s objective alludes to ‘securities market instruments’, which is generally understood to be in the context of public markets.
d) Stamp Duty on the transfer of Dematerialised Securities
Transfer of dematerialized securities between beneficial owners was earlier exempted from stamp duty provisions under section 8A(c)(ii) & (iii) of the Act. This provision has now been addressed by the Amendment and the earlier exemption has been removed.
Balancing the Power struggle between the State and Central government
One of the foremost concerns that can arise is the power overlapping between the central and the state government, as some parts of the Amendment come under the jurisdictional powers of the state government therefore acceptance of the amendment by the state governments might become a problem. Especially state governments, which imposed a higher rate as compared to the current uniform rate, may oppose the Amendment, as it may lead to revenue loss. Thus, the cooperation of the state governments is pivotal to the effective implementation of the Amendment.
Is the sluggish post-COVID market ready for this?
The amendment to the Stamp Act has positively reformed the process of levy and collection of the stamp duty in respect of instruments of transaction in stock exchanges and depositaries. Since the economy faces the herculean task of reviving itself in the aftermath of the COVID-crisis, the Amendment, which although was introduced last year, might have a positive impact in the days to come. Uniformity in the stamp duty rates and collection procedure is expected to reduce tax evasion and do away with problems like forum shopping of jurisdictions where instruments were stamped in states with lower stamp duty rates. This can also increase the overall revenue productivity, and so will ultimately prove to be a significant contributor in reviving the economy in the aftermath of COVID. However, the possible negative impacts of this amendment on the post-COVID market also cannot be ruled out. The above reforms in the stamp act will definitely shoot up the Government revenues in the coming days, however, it might potentially discourage the investors from investing. Although the Amendment is aimed at reducing the burden of double taxation, the removal of previously provided exemption will lead to the increased cost of the transaction. Now, the parties to the transaction will have to pay the tax on the transfer of securities regardless of whether such transfer occurred through a stock exchange or depository or through any other means. The market has already taken a toll due to the pandemic, the increase in the cost of the transaction of securities could dispirit the already suffering investors. With some favorable and some critical projections, it would be interesting to see what shape the market takes under the shadows of the amendment in the near future.