New Stamp Duty Norms On Shares, Debentures, Mutual Fund Units Effective Today

The amendment in the Indian Stamp Act, 1899 which casts an obligation on stock exchanges, depositories and authorised clearing corporation to collect stamp duty on transfer of securities like equity shares, debentures and mutual fund units comes into effect from July 1.

The government introduced this change through the union budget of 2019 by amending the Indian Stamp Act, 1899, and had initially planned to implement it from December last year. However, the implementation was deferred once and then again to July after the outbreak of the novel coronavirus.

State governments currently impose stamp duty on financial instruments at different rates. Brokers and other intermediaries are responsible to collect stamp duty on transactions and deposit it with the state under the current framework. Now, stock exchanges, depositories as well as the Clearing Corporation of India will collect stamp duty on any issue, transfer or sale of a security.

Stamp Duty Changes

Unlike the current system that often levies stamp duty on the buyer and seller, as per the new structure the duty will be incidental on the buyer or the seller, with only a few exceptions, said a finance ministry statement. For instance, the Finance Act provides that stamp duty will be levied on the buyer if sale of a security is done through a stock exchange. However, a seller must pay stamp duty if the sale is done off exchange. In the case of transfer of security, whether or not through a depository, the transferor will be liable to pay stamp duty. As for issue of security, on or off exchange, the issuer will have to pay the duty.

State-wise stamp duty rates will be replaced with following rates prescribed under the Finance Act, 2019 for transaction in securities other than debentures:

1. Issue of a security: 0.005%
2. Transfer of security on delivery and non delivery basis: 0.015% and 0.003%
3. Equity and commodity futures: 0.002%
4. Equity and commodity options: 0.003%
5. Currency and interest rate derivatives: 0.0001%
6. Other derivatives: 0.002%
7. Repo on corporate bonds: 0.00001%

For debentures, stamp duty will be charged at 0.005% on issuance and 0.0001% in case of transfer and re-issue. However, no stamp duty will be charged on government securities.

Hence, the amendment introduces a nationwide common rate of stamp duty on securities including mutual fund units.

The tax will be collected by the stock exchanges for all exchange-based secondary market transactions and by depositories for all off-market transactions and initial issue of securities in dematerialised form. CCIL has also been notified as a collection agent for over-the-counter derivative transactions and non-demat transactions in mutual funds under the stamp duty provisions, as per the finance ministry statement. The collection agents will transfer the stamp duty to the relevant states - where the buyer is located.

Impact On Trades

The impact of this new regime on costs is not uniform. In Maharashtra and Delhi, a BloombergQuint analysis had shown that while the duty rate per transaction will decline, the buyer may end up paying marginally more than earlier.

The finance ministry statement says for many segments this is a reduction in duty:

• The rate prescribed is lower for issue of equity/debentures and for transfer of debentures (including re-issue).
• For equity cash segment (delivery and non-delivery-based transactions) and options, since rates are to be charged only on one side there is an overall reduction in tax burden.
• Secondary market transfer of instruments which are traded with differences in a few basis points, like interest rate/currency derivatives or corporate bonds, are being charged at a lower rate versus existing rates.
• For the newly introduced ‘repo on corporate bonds’, a lower rate has been specified, since similarly positioned repo on government securities is not subject to duty.
• Mutual funds transactions were liable to paying duty as per various state laws - as they were delivery-based transaction in securities. The new system merely standardises the charges and collection of tax.

The changes are expected to increase transaction costs of proprietary trades, as BloombergQuint had earlier reported. To be sure, the levy of Securities Transaction Tax or STT continues on all securities transactions executed on exchanges.