The Central Government through the Finance Act, 2019 (‘Finance Act’) has introduced various amendments to the Indian Stamp Act, 1899 (‘Stamp Act’). While the amendments to Stamp Act were initially scheduled to come into force on 9 January 2020, however, the Ministry of Finance postponed the effective date of the amendments to 1 July 2020.
With an intent to bring uniformity in rates of stamp duty on both issuance and transfer of securities, whether in physical or dematerialized mode, the Central Government also introduced the Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 (‘Stamp Rules’). Collectively, the amendments to the Stamp Act and Stamp Rules, are aimed at simplifying the levy and collection of stamp duty by the States in India.
Authority to determine rate of stamp duty
- Pursuant to the provisions of Schedule 7 of the Constitution of India, the Central Government and State Government have been granted with the power to legislate laws upon items mentioned in the Union list, State list and Concurrent list.
- Entry 91 of the Union List enables the Central Government to prescribe rate of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts.
- Further, Entry 63 of the State List enable the State Government to prescribe rate of stamp duty for matter other than those mentioned in the Union list.
Stamp duty on issuance of shares
- The Finance Act has laid down a uniform stamp duty of 0.005% on issuance of securities other than debentures. This has been outlined in Schedule I of the Stamp Act.
- In this regard, it be noted that it needs to be seen as to how the rate of stamp duty will be applicable on issuance of shares as prescribed by the Finance Act considering that the same is specifically not a subject matter of Union List.
Introduction of certain new provisions
- The Finance Act has inter alia introduced two major sections i.e. Section 9A and Section 9B in the Stamp Act.
- The provisions of Section 9A of the Stamp Act provides that stamp duty paid on issuance and transfer of securities through depository and stock exchange shall now be collected on behalf of the State Government and no stamp duty shall be charged or collected by the State Government in cases of sale, transfer and issue of securities through a stock exchange or depositories and stamp duty on such issuance and transfer of securities shall be payable at the rate specified in Schedule I.
- Further, Section 9B lays down that a stamp duty on issue or transfer of securities otherwise than through a stock exchange or depository, shall be payable at the rate specified in Schedule I.
- In the aforesaid provision of Section 9A and 9B, it is pertinent to note that in case of transfer of securities, stamp duty is liable to be paid on the consideration amount for which such transfer is effectuated.
Gift of shares
- The advent of amendment to Stamp Act has led to an impactful change in transfer of shares. Erstwhile Article 62 of the Schedule I of the Stamp Act provided that in transfer of shares in a company (whether with or without consideration), a stamp duty of twenty-five paise for every hundred rupees or part thereof of the value of the share shall be imposed (effectively, 0.25%). This provision has now been omitted pursuant to the amendment to Stamp Act.
- Under the erstwhile Article 62 of the Schedule I, stamp duty was payable irrespective of whether there was consideration or not with respect to transfer of shares. This position seems to have changed since there is a change in the language employed now as it is chargeable on the consideration amount specified in the instrument.
- Pursuant to the amendment to Stamp Act proposed through the Finance Act, no stamp duty shall be levied in cases where no consideration amount is stated on the instrument, such as gift.
- To clarify this position the Frequently Asked Questions (FAQs) issued by the Department of Economic Affairs on Stamp Act and Stamp Rules also clearly lay down that no stamp duty will be charged on off-market transfer of securities without consideration such as on gift.
With respect to transfer of shares where no consideration amount is involved, a cost-effective mechanism has been introduced by the Central Government since such transfer does not attract stamp duty. Accordingly, the possibility of availing benefit of this can be explored in transactions involving transfer of shares such as gift of shares which may be pursuant to family arrangement or part of larger re-structuring exercise inter-se the promoters.
[The authors are Executive Partner and Associate, respectively, in the Corporate and M&A practice at Lakshmikumaran & Sridharan Attorneys, Gurugram]