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Budget 2019: Stamp Duty Reform May Plug Avoidance By Equity Investors


Stamp duty has been one of the major sources of direct tax revenue for the government, which is levied and payable under the Indian Stamp Act, 1899.

The Constitution empowers the central government to collect stamp duty on all documented financial instruments including bills of exchange, promissory notes, transfer forms for transfer of shares, debentures, bills of lading, debentures, proxies and letters of credit.

On the other hand, while state governments do not have the power to enact any laws for payment of stamp duty in respect of these instruments, each state can prescribe a stamp duty on other instruments that fall within its list, i.e. the state list, and is reflected in Schedule 1A of the Stamp Act.

Under the Stamp Act, the rate of tax on debentures or shares is decided by the central government, but the states do not follow this rate. Instead, they levy stamp duty on the total contract value that raises the transaction cost for investors. This would result in states using different powers in the law to tax these transactions at varied rates, which in turn lead to arbitrage, inasmuch as intermediaries would seek to route the transactions through states that offer lower rates than where they originate.

With a view to bring uniformity in the stamp duty rate across the country on transfer of financial instruments such as debentures and stocks on a destination-based principle, the government has made several attempts to amend the Stamp Act, but states have been reluctant to give up their powers to levy the duty.

However, after the successful nationwide implementation of Goods and Services Tax regime one and half years ago, the central government has managed to make inroads with the states agreeing to the changes to be made to the century old legislation.

Now, Finance Minister Piyush Goyal, presenting the final budget for Narendra Modi government, announced that the stamp duty regime for financial securities transactions will be amended in order to usher in a streamlined system. The fine print of Finance Bill 2019 seeks to, among other things,

  • Insert definitions for ‘securities’ including debentures, under the Stamp Act, and
  • Impose 0.005 percent stamp duty on the issue of securities other than debentures and of 0.015 percent on transfer thereof, on delivery basis.
(Image: Finance Bill)
(Image: Finance Bill)

The bill also seeks to levy stamp duty on equity transactions, which is contrary to the expectations of the brokers who in fact hoped for the abolishing of the securities transaction tax.

The two levies—stamp duty and STT—could increase the cost of transaction for investors.

On the other hand, the government’s proposal of levying stamp duty on one instrument relating to one transaction and new model for collection of stamp duty, is a welcome move. Stock exchanges are being authorised to collect stamp duty and distribute it to the states as per the domicile of the investor.

Albeit an additional burden, such compliance would stop leakages and end ambiguity about the applicable state rates, and where the stamp duty has to be deposited.

The stock exchanges have customers’ details and can easily credit the stamp duty to the concerned state.

With stamp duty being kept out of the GST ambit, these proposals showcase the government’s efforts to increase ease of doing business.

Jigar Doshi is an indirect tax partner at SKP Business Consulting LLP.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.