What Exactly is Stamp Duty?
As defined by the Government of India, "stamp duty refers to a tax that is levied on paper that documents various transactions. Stamp duty is collected for essential paperwork as outlined in the Stamp Act in each State."
Stamp duty is intended to be paid by the person claiming the benefit of ownership of property and those making a Transaction. Therefore, stamp duty is approximately determined by the value of the relevant transaction .
Primarily a State Law, stamp duty applies similarly across the country, but with minor variations, and is applicable to a range of transactions across all sectors of business. Amongst others, it is applicable on the purchase of Sale Deeds, Share Purchase Agreements, Agreements to Sell, Lease Agreements, Deposit Receipts, Partnerships, Power of Attorney, and Guaranties.
Legislative Provision for Stamp Duty in Mumbai
Mumbai, like the rest of India, is governed by the Indian Stamp Act, 1899 ("the Act"). The Act imposes stamp duty at a varying rates for different transactions. The Schedule I to the Act specifies stamp duty to be paid on various instruments prescribed by the Act. The principal factors determining the quantum of stamp duty are the value of the transaction and the category of instruments. A buyer of shares and securities in India is liable to pay the prescribed stamp duty in the name of the seller of the share or security. The act requires the seller of shares and securities to use stamp paper to the extent of the applicable stamp duty in Mumbai.
Some specific examples of the stamp duty applicable to sale of shares and securities in Mumbai are referred to below: Stamp duty on Share Purchase Agreements Stamp duty is payable as follows: On sale of shares or debentures valued at two rupees or upwards but on rate dependent on the Spring VAT applicable to the state If the sale is of stock, bonds, promissory notes, bills of exchange and cheques, stamp duty is payable as follows: Stamp duty is payable as follows: (i) For non-listed or private company 0.25% of the value of consideration or market value not exceeding Rs. 50,000 (Rupees Fifty Thousand only) or value stated in the agreement, whichever is higher; and for listed companies 0.25% of the value determined in accordance with Rule 3 of the Mumbai Stamp (Determination of True Market Value of the Property) Rules, 2013. Note – Stock includes shares, script, bonds, scrip or other marketable securities of any incorporated company If the sale is of Securities for the purpose of transferring the ownership, possession or control of any goods, wares and merchandise, article or any documents, then duty is payable as follows: Other transfer of shares of company are subjected to the provisions of Section 22A of the Act, which provides that: a) The names and particulars of the persons who signed and executed the instrument shall be furnished within 3 months from the date of execution of the instrument for assessment of stamp duty; b) If the person does not furnish particulars, then the company whose shares sought to be transferred are registered, shall disclose the information within 3 months; and c) If the company fails in furnishing the particulars, the buyer or seller shall provide such information within 3 months Further, sub-section (2) of the Section 22A requires the company to deliver to the Collector all instruments evidencing the transfer of shares and copies of resolutions to accept the transfers of shares kept by the company and maintain registers as required under Section 108 of the Companies Act, 1956.
Stamp Duty Payable on Share Purchase Agreements
Stamp duty in India is generally paid on the amount of consideration specified in the instrument. The amount of stamp duty on a share purchase agreement, however, is determined by the number of shares being sold, the price being paid per share and the stamp duty rate applicable to the relevant state of registration. The stamp duties applicable on share transfers are set out in Appendix A of the Stamp Act and increases in share value over time are meant to be accounted for by the payment of duty in the form of an increase in the per share cost. In Maharashtra, for example, the current rate is Rs. 25 for each hundred equity shares in a company. This means that the purchaser needs to pay a flat rate of Rs. 25 for each hundred equity shares in a company regardless of the actual price being paid for the shares.
It is important to understand that the stamp duty on share purchase agreements is only paid by the purchaser of the shares. Furthermore, no stamp duty is payable when shares are bought from, or sold to, a non-resident. However, stamp duty is payable at the rate of 6% percent of the transaction value when shares are bought from or sold to an Indian resident. There are eight different factors that determine the quantum of stamp duty payable during a share transaction. These include; i. the nature of the transfer of securities/stock; ii. the type of instrument used to carry out the transfer; iii. the statement of account/ contract/ advice to transfer; iv. the stamp duty payable under the Stamp Act; v. the rate of duty permissible based on the rules and regulations of the relevant Stock Exchange; vi. the schedule of the respective State Stamp Duty Act; vii. the provisions of the Foreign Exchange Management Act and the Securities Contract Regulation Act; and viii. the bye-laws of the respective Stock Exchanges.
Computation of Stamp Duty
Upon a sale between two registered owners of the shares and a deed etc., to give effect to the said agreement are not stampable. High Court has stated that in such cases, more stamp duty has been paid on the deed then what is payable under the provisions of the Stamp Act. The Bombay Stamp Act provides that when an instrument shall relate to stocks or shares, such instrument shall be stamped as an agreement or on the ad valorem value of the stock or share: Provided that in respect of shares, other than stock or fully paid up shares to which the provisions relating to stock apply, such instrument shall be chargeable with duty in the same manner and at the same rates as are leviable on conveyances under Article 25 as if the same were sold for cash for a consideration equal to the consideration for the sale of such stock or shares expressed in the instrument.
The determination of the value of the stock or share is to be calculated by reference to the latest price quoted on the principal stock exchange in India on the day last preceding the execution of the instrument, of which a copy is required to be filed. If such stock or shares is not quoted on any stock exchange, the value of the stock or share would be the price at which they were last sold prior to the execution, unless the stock or share has been previously transferred after the date of sale, when the value of the stock or share would be taken to be the price at which it was last sold. The Valuation Officer or a person nominated for the purpose by the office of the concerned Collector will determine the fair value of such stock or share where the stock or share is not quoted on any stock exchange, either on application of a party interested in the matter or su motu by the office of the concerned Collector.
The Bombay High Court held as under: The object of these provisions of the Bombay Stamp Act is evidently to ascertain the consideration for the transfer of stocks or shares. Clause ( b) of the explanation to section 6 requires that the value of the stock or shares shall be deemed to be the amount for which the stock or shares have been sold. Under clause ( c) of the explanation, it lays down that the price declared in the instrument shall be deemed to be the consideration for the transfer of stock or share as if the same were sold for cash at the same rate as the purchaser and seller could have sold. In other words, what this provision speaks of is the consideration for which the transfer of stock or shares has been made. If the stocks or shares are quoted on any stock exchange and they are sold for cash at the stock exchange, the argument proceeds, for that consideration, the price quoted should be the value of the stock for the purposes of calculating the stamp duty on the instrument transferring the shares. But where the stocks or shares have not been sold at the stock exchange, the fair value of the stocks or shares has to be determined based on the facts of each case not specifically provided in the articles. It cannot be exactly the value of stocks or shares computed under clause ( c ) of the explanation. These are simply alternatives. The argument of the learned counsel ignores the essential postulate of clause ( c ). The explanation assumes that there is a sale of stock or shares. The sale price is deemed to be the value for calculating the stamp duty under clause ( b). Further, it assumes there is no sale price available for assessing the value of stocks or shares. The fair value is determined under clause ( c). One method is not an alternative to the other method. In fact, in the latter method, the shares have been sold but not at the stock exchange.
Applicable Exemptions and Concessions
As specified under the Bombay Stamp Act, 1958, an exemption has been provided for stamp duty on agreements or any instruments executed by a company for issue of shares and debentures, which is exempt from income tax under the provisions of section 81 of the Income Tax Act. Further, an exemption for transfer of stock held by a development bank registered under the Industrial Development Bank of India Act, 1964 has been provided for, under any scheme framed for the purpose of promoting industrial development in the State of Maharashtra . Additionally, the Maharashtra stamp Act, 1958 exempts an agreement or any instrument executed in favour of the Development Bank of India Limited for the sale of any goods by or by the Government or promoter, or any guarantee / surety given in favour of the Development Bank of India Limited. Also, an exemption is provided for share transfers effected in the course of stock exchange transactions and currently, any orders issued by the competent authority with regards to industrial advancement and with regards to registration, pursuit, development, encouragement, expansion, growth / assistance, grant of industrial development or holding of industrial finance or other industrial grants by banks have been exempted.
Procedure for Payment and Filing
Stamp duty on Share Purchase Agreements in Mumbai is regulated by the Maharashtra Stamp Act, 1958. The stamp duty payable in Maharashtra is dependent on the consideration value or the market value of the shares, whichever is higher, per the Schedule I of rule 58 and the Maharashtra Stamp (Fixation of the rate of duty on transferrable development rights and merger or demerger of a company) Rules, 2006 as amended.
The stamp duty payable in Mumbai for shares issued for consideration other than cash is INR 10 per share or at the rate of the stamp duty that is payable on the issue of a single share (e.g. INR 12, 21, or 41 per share), whichever is higher.
The following forms need to be filed along with the payment of stamp duty:
- Declaration of amount payable as stamp duty in Form I;
- Annex E: Annexure for electronic filing of instruments; and
- Annex D: Annexure for e-payment of stamp duty.
It is mandatory for the purchaser to register online with the Inspector General of Registration and Stamp Revenue (IGR, Mumbai) at http://igrmaharashtra.gov.in for filing of the annexures. The printed and duly signed hard copy of the form, which is generated by the system, should then be deposited with the concerned Joint Sub-Registrar. At the time of submitting the form to the Joint Sub-Registrar the purchaser has to comply with the requirements as specified in the site e-services provided by the IGR, Mumbai.
At proportionate rates based on the terms of payment, the following applications for exemption from provisions of the Stamp Act can be submitted through the e-Sewa’s website of the IGR, Mumbai:
A. Application for exemption on the ground of industrial development
B. Application for exemption from Stamp duty on the ground of concessional rate
C. Application for exemption from stamp duty for credit upon sanction of loan under the said Stamp Act.
As of the date of publication, the online filing and payment of stamp duty are still not up and running in the State of Maharashtra.
Penal Provisions for Failure to Pay up Stamp Duty
In India, the failure to pay up the stamp duty amounts is liable to result in the imposition of a penalty up to ten times the duty amount, pursuant to Section 35 of the Maharashtra Stamp Act, 1958. If the amount of duty involved is less than Rupees 100, no penalty shall be levied under Section 35 of the Maharashtra Stamp Act in respect of any instrument. However, in practice, we have seen that this tenfold penalty is not typically being imposed by the regulatory authorities and tends to be imposed only in exceptional cases.
Section 36 of Stamp Act, prescribes that where an instrument is chargeable with duty and it is not duly stamped, it is necessary to pay both the proper duty as well as the penalty upon the proper stamp duty after paying the balance of the duty payable within two months from the date of execution of the instrument(s) in question. Failure to pay the entire proper duty amounts and the penalty within two months means that not only will the instrument be liable to be impounded and require payment of the correct duty and penalty, but the instrument would also remain unstamped thereby preventing its registration under the Registration Act, in case of a Sale Deed, and causing a difficulty in the admissibility of evidence in court proceedings, in case of a share purchase agreement.
If the Stamp duty is paid before the execution of the instrument in question, then revenue receipt would be available. However, if the payment of Stamp duty is made on a later date, then revenue receipt cannot be generated. The authority that issued the revenue receipt would be the authority from which the Stamp duty has been paid and such authority may have its office in a place other than Mumbai. Consequently, if the Stamp duty is paid in one centre and the agreement is executed in another place, then the revenue receipt cannot be exchanged for a stamp paper at the Stamp Office in Mumbai and the difficulty noted immediately above may arise.
As is clear, the Stamp Act imposes a stringent policy for recovery of Stamp duty since it was felt that extension of time for payment of the duty will lead to loss of revenue but it is advised that a waiver of penalties may be obtained from the Collector prior to instituting penal action.
Recent Policy Changes
In Mumbai, in an attempt to increase compliance levels of stamp duty provisions, the Maharashtra government, through a recent budget proposal, has proposed to amend the Stamp Act. The draft bill proposes that if any agreement concerning a share transfer is executed electronically or digitally, then stamp duty shall be charged on the basis of 2 percent of the value of the consideration at which the property is transferred, subject to a minimum of Rs. 25,000 (approx. $375) and a maximum of Rs. 50,00,000 (approx . $750,000) regardless of the stamp duty prescribed by Schedule I to the Stamp Act.
Further, if the transfer is via an electronic book- entry, stamp duty will be payable within two months from the date of transfer on basis of the stamp duty prescribed by Schedule 1 of the Stamp Act. As a penalty, the amount remaining unpaid will then be increased by two times the sum payable as stamp duty in terms of Schedule 1 of the Stamp Act.
However, electronic transfers undertaken via a depository account are exempt from the above-mentioned requirements.