By: Aastha Agarwalla
The President of India gave his assent to the amendment to the Indian Stamp Act, 1899 (hereinafter ‘the Act’) which was introduced in February 2019 as a part of the Finance Act, 2019 with the objective to bring together reformative measures to the existing stamp duty regime on financial securities transactions in the market.
The amendment to the Act aims to create a uniform and centralised institutional mechanism that will enable one authorised entity to collect stamp duty on securities market instruments in one place, and thus, reduce the instances of evasion of stamp duty. The amendment revolves around the principle of ‘one place, one agency and one instrument’. Further, it also intends to create an appropriate mechanism that facilitates effective sharing of the stamp duty collected by the authorised agency, based on the domicile of the buying client, between relevant State Governments, to avoid leakages and increase the revenue productivity of the states.
Prior to the said amendment, the stamp duty on financial instruments varied as multiple rates of stamp duty were prescribed for the same instrument, thereby resulting in disputes related to the multiple incidences of duty due to lack of clarity on jurisdiction. Therefore, with the multiplicity in the duties levied to the market participants on different instruments, a window was given to the investors for rate shopping and evasion of duty, thus, negatively affecting the capital formation of the economy.
In furtherance to it, as our country’s financial market has evolved significantly due to the technological changes, the archaic stamp duty provisions of the Act created ambiguity and lack of clarity in the digitalised era of financial market. In light of the above issues, after due deliberation, the Central Government decided to amend the Act to bring uniformity, affordability and zero evasion in the collection mechanism to curb tax evasion.
To rationalise the extant stamp duty structures, the amendments, inter-alia, amend certain key provisions of the Act to achieve the illustrated objectives of zero evasion in collection mechanism and encouragement of financial market activities. The key amendments to the Act are as follows:
(i) Removal of the exemption on the transfer of securities – One of the main highlights of the amendment is the discontinuation of the exemption/waiver of stamp duty on the transfer of securities in dematerialised form. Under the extant stamp duty regime, the transfer of dematerialised securities between beneficial owners is exempt from stamp duty. However, the amendment, by removing the waiver of stamp duty, introduces the stamp duty on such transfer of securities, listed or unlisted, in dematerialised form. Thus, only the transfer of securities from a person to a depository or from a depository to a beneficial owner shall continue to be exempted henceforth.
(ii) Onus of the stamp duty payments – In addition to this, the amendment clarifies the onus of the stamp duty payments in various transactions, which contrasts to the existing practice wherein the stamp duty is paid both by the buyer and the seller. With a clear stipulation of the circumstances stating who shall bear the brunt of the transaction by paying the stamp duty to the authorised agency, the amendment clears the existing ambiguity in the Act.
(iii) Centralised collection mechanism – To prevent multiple incidences of taxation, a single point of collection mechanism is introduced wherein stamp duty shall be collected solely by the depository or stock exchange which is declared as the authorised agency by the respective State Governments to collect the stamp duty. For all secondary market transactions in securities, stock exchanges shall collect the duty, and for off-market transactions and the initial issue of securities happening in dematerialised form, depositories shall collect the duty on behalf of the State Government.
Consequently, to facilitate the collection of stamp duty, stock exchanges/clearing corporations/depositories will get commission that is to be decided in consultation with the State Governments. Furthermore, 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 to the State Government where the residence of the buyer is located.
Such amendments to the extant stamp duty regime, on one hand, seeks to achieve the objective of revenue productivity by shoring up the revenues of the State Governments as all stamp duty waivers are removed, however, on the other hand, will negatively affect the financial market as it will increase the transaction cost of securities and mutual fund units for the investors.
Therefore, the increase of the transaction cost will lead to friction between various interest groups of the financial market as the amendment imposes an additional burden on the investors. Such transaction costs will also have a cascading effect on various commercial transactions in the future. For example, in corporate restructuring transactions such as mergers & acquisitions, a heavy amount of stamp duty will be levied on the companies because the transaction involves change in the hands of ownership through the transfer of shares, thereby discouraging M&A transactions in the market by pushing up the transaction cost for both domestic and international companies.
Furthermore, since there is a wide variance in the stamp duty among states, with the rationalisation of the stamp duty, some states such as Haryana, Assam, and Odisha will have to suffer due to an upsurge in the transaction cost at the national level, making trading in securities expensive for buyers and investors in the above-mentioned states.
The aforementioned amendments would usher in a streamlined process of collection and disbursement of stamp duty on securities transactions by minimising the cost of collection of the authorised agency, enhancing the revenue productivity of the states and reducing the forum shopping of jurisdictions.
Last but not the least, this system is a much-needed step in a sluggish economy as it will help to develop an equity culture across the length and breadth of the country, leading to a balanced regional development. However, many people believe, to the contrary, that such a levy of stamp duty on financial transactions in the developing era is an obsolete thing that will slow down the development of the equity market by hampering investors’ interest due to an increased transaction cost.
It is also worth noting that many countries like the United Kingdom, Ireland, Egypt and Singapore have also imposed stamp duty on stock transfers. However, to safeguard the interest of retail investors, there would be exemption of stamp duty on transfer if the value of the securities transferred is less than the pecuniary limit prescribed by the authority, thus facilitating a better performance of the financial market. Thus, what can be visualised from this is an effective collection mechanism of the stamp duty in the financial market by revamping the archaic stamp duty regime.
(Aastha is currently a law undergraduate at Campus Law Centre, Faculty of Law, New Delhi. She may be contacted at email@example.com.)
Cite as: Aastha Agarwalla, ‘Decoding the Amendment to the Indian Stamp Act, 1899’ (The RMLNLU Law Review Blog, 22 October 2019) <http://atomic-temporary-94482995.wpcomstaging.com/2019/10/22/decoding-the-amendment-to-the-indian-stamp-act-1899 > date of access.