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Stamp Duty on securities – Levy, Rates and Validity

I. Introduction

The Parliament vide the Finance Act, 2019 amended the India Stamp Act, 1899 (Act) to bring in various

changes as well as additions to Sec. 2 of the Act i.e. definitions provision w.e.f 1st

July, 2020. Furthermore,

changes were made to the rates of stamp duty with respect to issue & transfer of securities for both listed and

unlisted (dematerialized and non–dematerialized). This Article intends to inform the reader about the

authority for levy of stamp duty, various changes with respect to the rates of stamp duties and validity of those

changes.

II. Power of Levy

1. Who has the power to levy stamp duty?

The power of any Government, Department, agency or any other body

to levy any tax or duty is always derived from the Indian Constitution.

Any taxes or duty levied devoid of the power shall be deemed illegal.

Article 268 of the Constitution bestows power on the Union Govt. as

well as the State Governments to levy Stamp duties.

Article 268:

Duties levied by the Union but collected and appropriated by the States- (1) Such stamp duties as are mentioned in the Union List shall be levied by the Government of India but shall be collected— (a) in the case where such duties are leviable within any 2[Union territory], by the Government of India, and (b) in other cases, by the States within which such duties are respectively leviable. (2) The proceeds in any financial year of any such duty leviable within any State shall not form part of the

Consolidated Fund of India, but shall be assigned to that State.

It is clear from the above extract of the Article that the Government of India i.e. the Union Govt. shall have the

power to levy stamp duties. While it is levied by the Union Govt., in case of Union Territory, the Govt. of India

shall be responsible to collect such duties and in case of states, the State Govt. shall be responsible to collect

such duties.

2. What are the transactions on which the Union Govt. has power to levy stamp duty?

The Union List under the Seventh Schedule lists down the various subject matters on which the Parliament can

make laws and the Govt. of India shall be responsible to implement those laws. Entry 91 of the said list reads

as follows:

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Rates 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.

On reading Entry 91 it is clear that Parliament has power to prescribe rates of stamp duties only with respect

to the above instruments and no other instrument.

3. What are the transactions on which the State Govt. has power to levy stamp duty?

The State List lists down the subject matters on which the State Assemblies may make laws on. Entry 63 of the

said list reads as follows:

Rates of stamp duty in respect of documents other than those specified in the provisions of List I with regard

to rates of stamp duty.

Hence, it can be inferred from above that only the State Assemblies have power to enact laws with respect to

the rates and levy of stamp duties on instruments other than those mentioned in the Union List.

III. Rates of Stamp Duty

The Parliament with an intention to bring in uniformity in rates of stamp

duties with respect to securities all over the country and give a boost to

the securities market, has amended Schedule I of the Indian Stamp Act,

1899.

Article 27 was substituted with the following:

"27. DEBENTURE— [as defined by section 2 (10A)] (see sections 9A and 9B)

(a) in case of issue of debenture; 0.005%

(b) in case of transfer and re-issue of debenture

0.0001%

It is interesting to note that with the addition of the definition of the term Debenture and Securities, stamp

duties would be levied on all debentures whether listed or unlisted. Earlier only marketable debentures i.e.

those that were listed would attract stamp duty.

Article 56A has been inserted to include the following:

"56A. SECURITY OTHER THAN DEBENTURES (see sections 9A and 9B)—

a. Issue of security other than debenture 0.005%

b. Transfer of security other than debenture on delivery basis 0.015%

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c. Transfer of security other than debenture on non-delivery basis 0.003%

d. Derivatives:

(i) Futures (equity and commodity)

(ii) Options (equity and commodity)

(iii) Currency and interest rate derivatives

(iv) Other derivatives

0.002%

0.003%

0.0001%

0.002%

e. Government securities 0%

f. Repo on corporate bonds 0.00001%

It may be noted that the aforementioned new rates of stamp duty have been brought into effect from 1st

July,

2020. All transactions that are taking place on stock exchanges are being subjected to the new rates.

IV. Validity of levy

Although the change in rates of stamp duties has brought in uniformity and has

reduced the cost of transactions, as a professional one would surely question

the validity of the uniform levy of stamp duty all over the country with respect

to the issue of shares which has always been within the purview of State

Governments.

On reading Article 268 of the Constitution as well as the Union and State Lists of

the Seventh Schedule, one may infer the Union Govt. has the power only with

respect to levy of duty on transfer of shares while the power to levy stamp duty

with respect to issue of shares vests with the State Governments.

V. Conclusion

While it may be beneficial for the parties to a transaction to seek refuge under the new reduced rates of

stamp duty for issue of shares, it would be wise to follow the old rates prescribed under the state laws till

such time the State Assemblies amend their respective stamp duty laws.

CS Ratnamala Hegde, Principal Associate Date: 14th

September, 2020

Sreenivasan Narasimhan, Associate