What is Stamp Duty in India? How are Stamp Duty Rates Being Rationalised?

The Union Government has standardised and rationalised stamp duty rates on security transactions starting July 1st 2020. From now on, transactions involving shares, mutual funds and debt instruments will attract a stamp duty of 0.005% and those involving all other securities will attract a duty of 0.015%.

The levy of multiple stamp duties from parties involved in a transaction along with incongruencies in rates across different states was a trifling concern for industry bodies for a very long time.

What is Stamp Duty?

Stamp duty is a tax that the Government collects on legal documents that are involved in the process of transfer of assets or properties.

The tax is called stamp duty on the premise that the physical mark of stamp on the document is a proof of the authorities’ approval and payment of tax liability that arises on account of successfully conducting one’s business within the borders of a country.

Who Imposes Stamp Duties?

While the Constitution obligates both the Union and State Governments to fix the rates of stamp duties (Entry 91, List I; Entry 63, List II) the collection of duties is vested upon the State Governments under the Concurrent List (Entry 44, List III).

Keeping in tandem with the unitary spirit of the Constitution, the Union Government has historically taken charge of determining the rates of stamp duties via provisions under the Indian Stamp Act, 1899 (‘Stamp Act’). This statute has been amended several times, most recently by notifying the Finance Act 2019. It faced delayed notification and enforcement as late as July 1st 2020 and brought in some striking changes in stamp governance, which can be summarised as follows.

What are the Recent Changes Made to the Indian Stamp Act?

First, the definitions of terms like ‘securities’ and ‘instrument’ have been widened in scope. This has helped in bringing newer transactions (e.g. sale derivatives, corporate bonds, certificates of deposit, commercial usance bill, etc.) into the fold of stamp governance.

Second, ‘debentures’ are now brought under the application of Stamp Act, making it possible to levy duties on them, irrespective of their listed or unlisted nature.

Third, the replacement of the term ‘value’ with ‘market value’ has dispelled various ambiguities that went into determining the precise amount of duty.

Fourth, the transactions including stock splits, stock consolidation, mergers and acquisitions etc., where there is no effective change in beneficial ownership, have been exempted from levy of stamp duty.

Fifth, ‘demat transactions’ (electronic form), which have flourished in a dutiless environment for so long have been brought under the application of the Stamp Act.

Will the Amendment Rationalise Stamp Duties?

What sets the recent amendment apart from all the previous ones is the preoccupation with statutorily standardised rates for all kinds of securities. Essentially, this means that starting July 1st, stock exchanges will collect stamp duty on all the stocks and commodities that are traded on the exchange via physical or electronic medium at a uniform rate, be it shares, debentures, futures, options, currencies and other capital market instruments. The same rates shall be applicable to off-market transactions for unlisted securities and other transactions (inheritance of shares, gifts etc.). Additionally, as opposed to the practice of bipartisan levy previously, only one of the parties (the buyer) is now required to pay stamp duty, thereby avoiding multiplicity of payments.

The biggest advantage of these changes is in the form of cross-border parity in rates of levy. Since stamp duty is a capital expenditure, it effectively disincentivises establishment and conduct of business transactions in areas where duties are higher. Uniform rates across all states in the coming days will give rise to equal opportunities for business and greater competition among the states to attract businesses via favourable internal policy changes.

The uniformity and rationalisation of the collection systems is also an exhibition of federal maturity for our nation. Simplification of levying processes reduces unwarranted regulatory logjams and jurisdictional disputes. The added class of demat transactions that are now under the ambit of levy will add to the states’ revenue and contribute to Government purses at a time when the country is in a quintessential need of newer sources of revenue that can be expended into the management of the pandemic. Most of the security transactions that take place are in electronic form and the new system will ensure effective collection of the revenues they tap.

The amendments that have been effected in the Indian Stamp Act, 1899 have been prudently welcomed by all classes of stakeholders. Standardisation of duties is not only in the interests of promoting regional development across states, it also contributes to the ease of doing business. It is a primal step towards developing equity markets and promoting an equity culture in a country that has proved to be most promising for capital markets.

(Originally published August 13th 2020 in transfin.in)