Proposed Stamp Duty on transactions in securities : 05-02-2019

Presently, if securities are purchased or sold under depository scheme, no stamp duty is payable. These provisions were made in 1995 to encourage the Depository Scheme. The Depository Scheme is working very well in stock market.

Now, stamp duty is proposed to be introduced on transactions on stock exchange, for which amendments to Indian Stamp Act are proposed in Finance Bill, 2019, presented before Parliament on 1-2-2019.

The stamp duty will be collected by Stock Exchange, Clearing Corporation or Depository and will be paid to respective State Governments.

The proposed scheme of stamp duty on transactions in securities is discussed in this article.

1.1 Background

While presenting Finance Bill, 2019, all attention was towards proposed changes in Income Tax. Proposed changes in stamp duty on transactions in securities almost went unnoticed. However, this stamp duty will have impact on securities market, though, in my view, market should be able to bear this burden.

Presently, if securities are purchased or sold under depository scheme, no stamp duty is payable. These provisions were made in 1995 to encourage the Depository Scheme. The Depository Scheme is working very well in stock market.

Now, stamp duty is proposed to be introduced on transactions on stock exchange, for which amendments to Indian Stamp Act are proposed in Finance Bill, 2019, presented before Parliament on 1-2-2019.

Really, the aim of Government is to reduce multiplicity of taxes, reduce compliance costs and promote ‘ease of doing business’. The proposed stamp duty on transactions in securities is against all these principles.

The purpose could have been achieved by making suitable changes in GST Law.

1.1-1 Purpose of proposed amendments to Indian Stamp Act

As per para 13 of Statement of Objects and Reasons appended to Finance Bill, 2019 (presented before Parliament on 1-2-2019), the object of proposed amendments to the Indian Stamp Act, 1899 is to provide for levy and administration of stamp duty on securities market instruments by the States at one place through one agency, viz., through Stock Exchanges or its Clearing Corporation or Depositories on one instrument, and for appropriately sharing the same with respective State Governments based on State of domicile of the ultimate buying client.

1.1-2 Constitutional Background of Stamp Duty on transaction in securities

Entry 90 of List I of Seventh Schedule to Constitution of India (i.e. Union List) reads as follows : ‘Taxes other than stamp duties on transactions in stock exchanges and future markets.

Entry 91 of List I of Seventh Schedule to Constitution of India (i.e. Union List) reads as follows : “Rate of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letter of credit, policy of insurance, transfer of shares, debentures, proxies and receipts.

Entry 63 of List II of Seventh Schedule to Constitution of India (i.e. State 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.

Entry 44 of List III of Seventh Schedule to Constitution of India (i.e. Concurrent List) reads as follows : “Stamp duties other than duties or fees collected by means of judicial stamps, but not including rates of stamp duty”.

Thus, Parliament can make laws in respect of stamp duty. However, it cannot impose stamp duty on transactions in stock exchanges and future markets and it cannot fix rates of stamp duties.

Though stamp duty is concurrent subject, Parliament cannot prescribe stamp duty rates on transactions in stock exchanges. However, the proposed amendment to Indian Stamp Act prescribes stamp duty rates also.

Constitutional validity of these provisions seems doubtful, particularly because Entry 90 of List I specifically prohibits imposition of stamp duty on transactions in stock exchanges and future markets.

In my view, State Governments will have to ratify the imposition of stamp duty on transactions on stock exchange and their rates.

1.2 Liability of instruments of transaction in stock exchanges and depositories to stamp duty

Part AA is being introduced in Chapter II of Indian Stamp Act to impose stamp duty on transactions in stock exchanges and depositories, vide clause 15 of Finance Bill, 2019.

The provision is as follows.

Notwithstanding anything contained in the Indian Stamp Act, Stamp duty will be levied on – (a) sale of any securities, whether delivery based or otherwise, is made through a stock exchange (b) any transfer of securities for a consideration, whether delivery based or otherwise, made by a depository otherwise than on the basis of any transaction referred to in clause (a) above (c) Stamp duty on allotment list on issue of securities. – Section 9A(1) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

“Stock exchange” includes— (i) a recognised stock exchange as defined in section 2(f) of the Securities Contracts (Regulation) Act, 1956; and (ii) such other platform for trading or reporting a deal in securities, as may be specified by the Central Government, by notification in the Official Gazette, for the purposes of this Act – section 2(27) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

“Allotment list” means a list containing details of allotment of the securities intimated by the issuer to the depository under section 8(6) of the Depositories Act, 1996 – section 2(1) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

“Issuer” means any person making an issue of securities – section 2(15A) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

Depository” includes–– (a) a depository as defined in section 2(1)(e) of the Depositories Act, 1996; and (b) any other entity declared by the Central Government, by notification in the Official Gazette, to be a depository for the purposes of this Act – section 2(10B) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

The details of each levy are given below.

1.2-1 Stamp duty on sale of securities through stock exchange

When the sale of any securities, whether delivery based or otherwise, is made through a stock exchange, the stamp-duty on each such sale in the clearance list shall be collected on behalf of the State Government by the stock exchange or a clearing corporation authorised by it, from its buyer on the market value of such securities at the time of settlement of transactions in securities of such buyer, in such manner as the Central Government may, by rules, provide – Section 9A(1)(a) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

“Clearance list” means a list of transactions of sale and purchase relating to contracts traded on the stock exchanges submitted to a clearing corporation in accordance with the law for the time being in force in this behalf – section 2(7A) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

“Clearing corporation” means an entity established to undertake the activity of clearing and settlement of transactions in securities or other instruments and includes a clearing house of a recognised stock exchange – section 2(7B) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

Thus, responsibility of stock exchange or clearing corporation is only to collect stamp duty and pay to respective State Government.

Person who would be liable to pay stamp duty has been specified in section 29 of Indian Stamp Act (discussed later).

1.2-2 Stamp duty on transfer of securities made by depository

When any transfer of securities for a consideration, whether delivery based or otherwise, is made by a depository otherwise than on the basis of any transaction referred to in section 9A(1)(a) of Indian Stamp Act, the stamp-duty on such transfer shall be collected on behalf of the State Government by the depository from the transferor of such securities on the consideration amount specified therein, in such manner as the Central Government may, by rules, provide – Section 9A(1)(b) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

Thus, responsibility of depository is only to collect stamp duty and pay to respective State Government.

Further, this responsibility arises only when transaction is not routed through stock exchange or clearance corporation.

Person who would be liable to pay stamp duty has been specified in section 29 of Indian Stamp Act (discussed later).

1.2-3 Stamp duty on creation or change on basis of allotment list

When pursuant to issue of securities, any creation or change in the records of a depository is made, the stamp-duty on the allotment list shall be collected on behalf of the State Government by the depository from the issuer of securities on the total market value of the securities as contained in such list and in such manner as the Central Government may, by rules, provide – section 9A(1)(c) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

“Issuer” means any person making an issue of securities – section 2(15A) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

The responsibility of depository is only to collect stamp duty and pay to respective State Government.

Person who would be liable to pay stamp duty has been specified in section 29 of Indian Stamp Act (discussed later).

Stamp duty on ‘creation’ of record by depository – The word ‘creation’ implies that when issuer issues securities and these are credited to investor (beneficial owner), stamp duty will be payable on market value.

As per section 8A(a) of Indian Stamp Act , if the issuer issues securities to one or more depositories, it will have to pay stamp duty on total amount of security issued by it and such securities need not be stamped. Thus, in my view, issuer has to pay stamp duty on issue of securities to stock exchange or clearing corporation (or depository?). The stock exchange or clearing corporation (or depository?) has to collect stamp duty on ‘creation’ of record by depository. Let us wait for rules to be issued.

Stamp duty on ‘change’ of record by depository – Stamp duty is collectable by depository on ‘change’ of record by depository. If such change is by sale through stock exchange, the clearing corporation will be responsible to collect stamp duty. If such change is without involving stock exchange (direct), the Stamp duty will be collectable on any transfer of securities by depository, before transferring security in favour of fresh beneficial owner.

1.2-4 No stamp duty to be collected on these transactions by State Government

From the date of commencement of this Part (i.e. part AA of Indian Stamp Act which covers sections 9A and 9B of Indian Stamp Act), no stamp-duty shall be charged or collected by the State Government on any note or memorandum or any other document, electronic or otherwise, associated with the transactions mentioned in section 9A(1) of Indian Stamp Act – section 9A(3) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

As seen above, it is doubtful if Parliament has powers to impose such restriction on State Governments in view of constitutional limitations.

1.3 Depository and Participant

Securities of all listed companies and unlisted public companies are required to be in dematerialised form i.e. in electronic mode (In case of listed companies, shares in physical form cannot be transferred as per SEBI guidelines). Only private companies can still issue share certificates in physical form.

As per section 2(1)(e) of Depositories Act, depository means a company which has been granted certificate of registration by SEBI. Two ‘depositories’ have been established – NSDL and BSE.

As per section 2(g) of Depositories Act, ‘participant’ means a person registered as such under section 12(1A) of SEBI Act.

Participant is agent of depository. All the securities of a body corporate are held in name of depository. The depository is ‘registered owner’ in the register of issuer of securities. Name of owner of security (termed as ‘beneficial owner’) is recorded with depository.

Securities are in demat (dematerialised) form with depository.

‘Depository’ is an agency with whom securities are deposited for safe-keeping and handling / dealing in them on behalf of owner of securities. The securities are deposited through DP (Depository Participants). Depository holds these securities in electronic form. There is no paper or share certificate involved. Such shares are termed as ‘Demat Shares’.

There are ‘depository participants’ (DP) who act as agents for depositories. ‘Depository Participant’ is an intermediary between investor and depository. Investor has no direct access to the depository. Such ‘participants’ could be banks, financial institutions or large brokers. The depositories and participants have to be registered with SEBI.

A depository is a system which holds shares in the form of electronic account. Depository system is very similar to a banking environment. A depository performs the function of holding, safe-keeping, transferring and allowing withdrawal of securities. (like bank performs the function of holding, safe-keeping, transferring and withdrawal of money).

Individual investor (termed as BO – Beneficiary Owner) has to open account with ‘participant’. He can open account with more than one participants, if he wants. This is similar to opening a bank account.

The beneficial owner (i.e. the investor) can pledge or hypothecate the security owned by him through a depository.

The beneficial owner can sale securities which are in demat form in record of depository.

An investor (BO – Beneficiary Owner) can nominate a person who can get his shares after death. In case of share holding is in joint name, if one shareholder dies, the shares are transferred in name of surviving member on submission of death certificate of member. Nominee will get shares only when all joint holders die. Nomination can be changed.

1.3-1 Responsibility of stock exchange or depository to collect and pay stamp duty to State Government

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 under section 9A of Indian Stamp Act to the State Government where the residence of the buyer is located and in case the buyer is located outside India, to the State Government having the registered office of the trading member or broker of such buyer and in case where there is no such trading member of the buyer, to the State Government having the registered office of the participant – section 9A(4) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

The term “participant” shall have the same meaning as assigned to it in section 2(g) of the Depositories Act, 1996 – Explanation to section of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

As per section 2(g) of Depositories Act, ‘participant’ means a person registered as such under section 12(1A) of SEBI Act. Participant is agent of depository. All the securities of a body corporate are held in name of depository. The depository is ‘registered owner’ in the register of issuer of securities. Name of owner of security (termed as ‘beneficial owner’) is recorded with depository.

Collection charges payable to stock exchange or depository – Before such transfer to respective State Government, the stock exchange or the clearing corporation authorised by it or the depository shall be entitled to deduct such percentage of stamp-duty towards facilitation charges as may be specified in such rules – proviso to section 9A(4) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

Submitting details of transactions to State Government – Every stock exchange or the clearing corporation authorised by it and depository shall submit to the Government details of the transactions referred to in section 9A(1) in such manner as the Central Government may, by rules, provide – section 9A(5) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

1.3-2 Payment of stamp duty when securities issued on private basis

Stamp duty is payable when securities are issued privately (i.e., not through stock exchange), stamp duty is payable by issuer, as per section 9B of Indian Stamp Act. The provisions are as follows –

Notwithstanding anything contained in this Act,–– (a) when any issue of securities is made by an issuer otherwise than through a stock exchange or depository, the stamp-duty on each such issue shall be payable by the issuer, at the place where its registered office is located, on the total market value of the securities so issued at the rate specified in Schedule I (b) when any sale or transfer or reissue of securities for consideration is made otherwise than through a stock exchange or depository, the stamp-duty on each such sale or transfer or reissue shall be payable by the seller or transferor or issuer, as the case may be, on the consideration amount specified in such instrument at the rate specified in Schedule I – section 9B of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

1.4 Meaning of various terms used in section 9A

Various terms used in section 9A of Indian Stamp Act, which provides for imposition of stamp duty on transactions in securities are explained below.

1.4-1 Meaning of ‘security’

“Securities” includes— (i) securities as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956; (ii) a “derivative” as defined in section 45U(a) of the Reserve Bank of India Act, 1934; (iii) a certificate of deposit, commercial usance bill, commercial paper, repo on corporate bonds and such other debt instrument of original or initial maturity upto one year as the Reserve Bank of India may specify from time to time; and (iv) any other instrument declared by the Central Government, by notification in the Official Gazette, to be securities for the purposes of this Act – section 2(23A) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

Thus, definition of ‘security’ is much wider than that covered under Securities Contracts Act.

‘Security’ as per Securities Contracts Regulation Act – ‘Securities’ include –

(i) Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate
(ia) Derivative
(ib) Units or any other instrument issued by any collective investment scheme to the investors in such schemes (ic) Security Receipt issued by Securitisation Company, as defined in section 2(1)(zg) of ‘Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002’
(id) Units or other such instruments issued to investors under any mutual fund schemeExplanation – For the removal of doubts, it is herby declared that ‘securities’ shall not include any unit linked insurance policy or scrips or any such instrument or scrip, by whatever name called, which provides a combined benefit of risk on life of persons and investment by such persons and issued by insurer referred in section 2(9) of Insurance Act
(ie) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity, which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be
(ii) Government securities
(iia) Such other instruments as may be declared by the Central Government to be securities; and
(iii) Rights or interest in securities . [section 2(h) of SCRA]

Derivative – Derivative includes (A) A security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security (B) A contract which derives its value from the prices, or index of prices, of underlying securities(C) Commodity derivatives and (D) Such other instruments as declared by Central Government to be derivatives [section 2(ac) of SCRA].

Government security – It means a security created and issued, whether before or after the commencement of this Act, by the Central Government or a State Government for the purpose of raising a public loan and having one of the forms specified in clause (2) of section 2 of the Public Debt Act, 1944 [section 2(b) of SCRA].

Option in securities – It means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities. [section 2(d) of SCRA].

Marketable security – “Marketable security” means a security capable of being traded in any stock exchange in India – section 2(16A) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

1.4-2 Meaning of ‘derivative’

As per section 45-U(a) of RBI Act, ‘derivative’ means an instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called ‘underlying’), or a combination of more than one of them and includes interest rate swaps, foreign currency swaps, foreign currency-rupee swaps, foreign currency options, foreign currency-rupee options or such other instruments as may be specified by the RBI from time to time.

1.4-3 Meaning of ‘bond’

“Bond” includes— any instrument whereby a person obliges himself to pay money to another, on condition that the obligation shall be void if a specified act is performed, or is not performed, as the case maybe (b) any instrument attested by a witness and not payable to order or bearer, whereby a person obliges himself to pay money to another; and (c) any instrument so attested, whereby a person obliges himself to deliver grain or other agricultural produce to another; but does not include a debenture – section 2(5) of Indian Stamp Act – words in italics proposed to be inserted vide Finance Bill, 2019.

The ‘debentures’ have been excluded as these are separately defined in Indian Stamp Act. This is done as rate of stamp duty on transfer and re-issue of debentures is different from stamp duty on transfer of other securities [see Article 27 and 56A of Schedule I of Indian Stamp Act].

1.4-4 Meaning of ‘debenture’

“Debenture” includes–– (i) debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not; (ii) bonds in the nature of debenture issued by any incorporated company or body corporate; (iii) certificate of deposit, commercial usance bill, commercial paper and such other debt instrument of original or initial maturity upto one year as the Reserve Bank of India may specify from time to time; (iv) securitised debt instruments; and (v) any other debt instruments specified by the Securities and Exchange Board of India from time to time – section 2(10A) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

1.5 Rates of stamp duty on transactions on stock exchanges or depository

Notwithstanding anything contained in this Act, the instruments referred to in section 9A(1) shall be chargeable with duty as provided therein at the rate specified in Schedule I and such instruments need not be stamped – section 9A(2) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

The proposed rates given in Schedule I to Indian Stamp Act are as follows –

Article 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%.

Article 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% (c) transfer of security other than debenture 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%.

1.6 Value for purpose of stamp duty

Where an instrument is chargeable with ad valorem duty in respect of any stock or of any marketable or other security, such duty shall be calculated on the market value of such stock or security, Provided that the market value for calculating the stamp-duty shall be, in the case of–– (i) options in any securities, the premium paid by the buyer; (ii) repo on corporate bonds, interest paid by the borrower; and (iii) swap, only the first leg of the cash flow – section 21 of Indian Stamp Act. The words in italics proposed to be inserted vide Finance Bill, 2019.

“Market value”, in relation to an instrument through which— (a) any security is traded in a stock exchange, means the price at which it is so traded; (b) any security which is transferred through a depository but not traded in the stock exchange, means the price or the consideration mentioned in such instrument; (c) any security is dealt otherwise than in the stock exchange or depository, means the price or consideration mentioned in such instrument – section 2(16B) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

1.7 Person who is liable to pay stamp duty

The stock exchange, clearing corporation or depository are only collecting agencies. They will collect stamp duty from persons liable to pay stamp duty and will Person who is liable to pay stamp duty is specified in section 29 of Indian Stamp Act.

The provisions relevant to transactions in securities are as follows –

In the absence of any agreement to the contrary, the expense of providing the proper stamp shall be borne—

(h) in the case of sale of security through stock exchange, by the buyer of such security

(i) in the case of sale of security otherwise than through a stock exchange, by the seller of such security

(j) in the case of transfer of security through a depository, by the transferor of such security

(k) in the case of transfer of security otherwise than through a stock exchange or depository, by the transferor of such security

(l) in the case of issue of security, whether through a stock exchange or a depository or otherwise, by the issuer of such security; and

(m) in the case of any other instrument not specified herein, by the person making, drawing or executing such instrument – section 29 of Indian Stamp Act – words in italics proposed to be inserted vide Finance Bill, 2019.

1.8 Penalty for failure to comply with provisions of section 9A of Indian Stamp Act

Any person who,–– (a) being required under section 9A(1) of Indian Stamp Act to collect duty, fails to collect the same; or (b) being required under section 9A(4) of Indian Stamp Act to transfer the duty to the State Government within fifteen days of the expiry of the time specified therein, fails to transfer within such time, – – shall be punishable with fine which shall not be less than one lakh rupees, but which may extend up to one per cent of the collection or transfer so defaulted – section 62A(1) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

Any person who,–– (a) being required under section 9A(5) of Indian Stamp Act to submit details of transactions to the Government, fails to submit the same; or (b) submits a document or makes a declaration which is false or which such person knows or believes to be false, shall be punishable with fine of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less – section 62A(2) of Indian Stamp Act proposed to be inserted vide Finance Bill, 2019.

Conclusion

1.9 In view of huge transactions taking place in stock exchange, the revenue of each State Government will surely increase. Impact on stock market may be moderate.

The proposed levy is against Government’s stated goal of reducing multiplicity of taxes, reducing compliance costs and promoting ‘ease of doing business’.

The purpose could have been achieved by making suitable changes in GST Law.

The proposed levy is also doubtful in view of Constitutional limitations on Parliament in imposing the stamp duty on transactions in securities and fixing rates, unless State Governments ratify the levy.

Source : Financial Express