The Central Government has recently amended the Indian Stamp Act, 1899 (ISA) vide the Finance Act, 2019 (Amended Stamp Act), which came into effect from July 01, 2020, with the objective of streamlining the levy and administration of stamp duty on transactions involving financial securities. Earlier, the stamp duty regime on these transactions led to multiple rates of stamp duty on the same instrument in different states, resulting in jurisdictional disputes and multiple incidences of duty on a single transaction. This raised the overall transaction costs in the securities market which often made the participants indulge in rate shopping and evasion of duty. For instance, prior to the Amended Stamp Act, a company would have preferred to have its registered office in Kolkata over Karnataka as the issuance of shares in Kolkata would attract lesser stamp duty compared to Karnataka.

To alleviate such issues, the amendments have been introduced under the ISA vide the Amended Stamp Act. The amendments made under the ISA propose to create a legal and institutional mechanism to enable the States to collect stamp duty on all securities market instruments at one place by one agency i.e., the stock exchanges or clearing corporations authorised by the stock exchange or by the depositories. Pursuant to the Amended Stamp Act coming into force, the Indian Stamp (Collection of Stamp Duty through Stock Exchanges, Clearing Corporations, and Depositories) Rules 2019 (Rules) have also taken effect from 1 July 2020.

The Rules specify the manner in which the stock exchanges and depositories are required to collect stamp duty, determine transactions (whether on delivery basis or not), transfer stamp duty to respective States, file returns, etc. Further, the Rules also provide procedure for payment of stamp duty with respect to transactions involving issue/transfer of shares in dematerialized form.

In this article, we have discussed the major changes in the Amended Stamp Act, including the manner of collection of stamp duty and transferring the same to the respective States.

Onus of payment of stamp duty

The Amended Stamp Act states the persons liable to pay stamp duty in transactions relating to securities vide amendment to Section 29 of the ISA. We have listed below the nature of transactions and the person liable to make stamp duty in such transactions:

Nature of transaction                                                                   Onus

Sale of security through stock exchange                                        Buyer

Sale of security otherwise than through stock                                Seller

exchange 

Transfer of security through depository                                           Transferor

Transfer of security otherwise than through a stock

exchange or depository                                                                   Transferor

Issue of security (whether through a stock

exchange or a depository or otherwise)                                           Issuer

In case of any other instrument not specified in

Section 29 of the ISA                                                                   By the person making,                                                                                                    drawing or executing such instrument

Revised Stamp Rates: The Amended Stamp Act has inserted Article 56A in Schedule I of ISA which provides the following rates of stamp duty for different kinds of transactions involving securities other than debentures:

Sl. no. Entry                                                                                    Stamp duty

Securities other than debentures

a. Issuance of securities                                                                       0.005%

b. Transfer of securities on delivery basis                                            0.015%

c. Transfer of securities on non-delivery basis                                     0.003%

d. Derivatives

i. Futures (equity and commodity)                                                        0.002%

ii. Options (equity and commodity)                                                       0.003%

iii. Currency and interest rate derivatives                                             0.0001%

iv. Other derivatives                                                                              0.002%

e. Government securities                                                                      0%

f. Repo on corporate bonds                                                                   0.00001%

The Amended Stamp Act further provides that the stamp duty is payable only on the principal instrument. This will eliminate multiplicity of payments of stamp duty on transactions involving execution of several instruments.

Mechanism for collection and payment of stamp duty

The modus operandi for payment of stamp duty, and the responsibility of the stock exchanges, clearing corporations and depositories for collection of duty, while effecting the transactions and transfer of same to respective state governments is discussed hereinbelow:

(a) Sale of Securities made through stock exchange: For stock exchange based secondary market transactions of securities, the stamp duty would be collected by, stock exchanges or clearing corporations authorised by it from the buyer on market value of such securities on the settlement day. Further, for transactions arising from tender offer, open offer or offer for sale or private placements executed through stock exchange, the stamp-duty will be collected from the offeror, on the market value of the security being acquired or sold out, at the offer price, once the offer is successfully completed.

(b) Transfer of securities made by a depository: For transfer of securities for a consideration, whether delivery based or otherwise, through off-market transaction or over the counter trade occurring in dematerialised or electronic form, the depository, before execution of said transfer, would collect the stamp duty from the transferor on the consideration amount as specified in the delivery instruction slip. Further, in the case of transfer of securities pursuant to invocation of pledge, duty shall be collected from the pledgee on the market value of the securities.

(c) Issue of securities in demat form: For initial issue of securities in demat form, depositories are now required to collect the stamp duty from the issuer, before executing any transaction in the depository system, on the total market value of securities as contained in the allotment list submitted by the issuer pursuant to the issue of securities. In this regard, it must be noted that except in the case of a fresh issue made to any investor, issue of securities on account of any corporate action such as stock split, stock consolidation, mergers and acquisitions or similar actions, the depository cannot collect any stamp duty on creation or destruction of securities occurring on account of such corporate action not involving any change in beneficial ownership.

It must be further noted that in case of an acquisition of shares of minority shareholders by majority shareholders under section 236 of Companies Act, 2013, implemented by way of a corporate action, the stamp duty on such transfers shall be collected by the depository from the issuer, instead of from the transferor.

Process of transfer of stamp duty to respective states

The collecting agent, i.e. stock exchange/clearing corporation/depository, are required to, within 3 weeks from the end of each month, transfer the amount of stamp duty collected in the relevant month, after deducting the facilitation charges therefrom, in the designated bank account of the concerned State Government maintained with the Reserve Bank of India or scheduled commercial bank. The concerned State Government shall be decided based on the following criteria:

(a) In case the buyer is located in India, the State Government where the residence of buyer is located.

(b) Where the buyer is located outside India, the State Government wherein registered office of trading member or broker of such buyer is located or registered office of participant when there is no trading member or broker involved.

The Rules also specify the responsibility of collecting agent to submit (i) a monthly return of stamp duty collected on various transactions (including details of defaulters) within 7 days of succeeding month to the concerned State Government; and (ii) an yearly consolidated return of stamp duty collected during a financial year by respective June 30 to the concerned State Government and the Accountant General of each State.

Impact of amendments

From the above discussion, one would note that issuance of securities have been brought into the same framework as that of trading of securities, that is, authorising depositories to collect duty from companies and redistribute the same to States based on the domicile State of subscribers /buyers of security. Further, with the removal of the exemption of stamp duty on transfer of shares in dematerialized form, transaction costs are likely to increase.

Having said the above, the new framework of centralised collection mechanism would curb the jurisdictional arbitrage in case of financial securities transactions and is expected to provide a stable and increased revenue collection by the States as all such transactions are chargeable with a uniform rate of duty. In view of the above, the changes introduced vide the Amended Stamp Act would help rationalize and standardize the stamp duty regime in India.