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Stamp Duty on transfer of Shares and Debentures

Dated: September 14, 2018

Stamp Duty was introduced in India by the Britishers by enacting the Indian Stamp Act, 1899. The main aim of the stamp duty as stated by the legislature while enacting it was said to be a fiscal statute, the principal object of which being to secure the revenue for the respective state government. The other aim of stamping a document is to signify its legal validity and implication as evidence in case of any dispute or at the time of enforcement. Stamp duty is a type of tax which is paid to the State Government for the transaction performed by way of document or instrument under the relevant provisions. Thus in accordance with the same, the state legislature is enacted with powers mentioned under the Constitution of India to amend the Indian Stamp Act 1899, for its application in the respective jurisdiction for the property, documents and instruments. But the scope of amendment is limited only to the areas conferred under the Constitution mentioned in the state list.  Stamp duty is payable on the Instruments or documents  mentioned in the Schedule-I of the Indian Stamp Act, which includes Share and Debenture.  
By far it is very clear that in most of the cases falls within the ambit of the state legislature. Various states have amended the Indian Stamp Act according to their convenience, while others enacted a separate statue for the same.   
Sec 44 of the Companies Act, 2013 says that, shares and debentures are moveable property. Stamp duty is imposable on the purchase and on transfer of shares. Though a share itself is not an instrument, the share certificate is an instrument and hence a stampy duty is levied on the same. On the purchase of shares collection of stamp duty falls within the sphere of the state legislature. While at the same time when a share is transferred then this falls within the ambit of the central government.  Hence from the above mentioned it can be said that in case of purchase the stamp duty may vary from state to state and is paid to the state treasury, while in the matter of transfer, the amount is paid to the centre and is uniform. So the stamp duties for purchase of a share of a company will be different while the one which is paid during the transfer of shares.
Debentures fall in the category of a transferable property. An actionable claim over the debenture can be transferred as per the section 130  of the Transfer of Property Act. Actionable claim is defined in Sec 3 of the Transfer of Property Act. It states, ‘Actionable Claim is a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in possession either actual or constructive, of the claimant, which the civil courts recognize as affording grounds of relief whether such debt or beneficial interest be existent, accruing or conditional or contingent.’

SHARES
Though stock market investments are driven by the high amount of return they provide. With the investment there is a risk of high loss or high gains. As stated earlier, stamp duty is levied on transfer of shares, regardless of the condition of transfer. Earlier a physical stamp was attached to the document, but now due to the technological advancement, electronic method is used and preferred.
In view of the Supreme Court of India, A share is not a sum of money but an interest measured by a sum of money and made up of various rights and liabilities. A share is an existing bundle of rights. CIT v. Standard Vacuum Oil Co, (1966) Comp LJ 17 SC.

STAMP DUTY ON ISSUANCE OF SHARES
As mentioned in Section 3(a) of Indian Stamp Act every instrument which falls in the Schedule-I of Indian Stamp Act which, has not been previously executed by any person, is executed in India; shall be chargeable  with a stamp duty of the amount indicated in Schedule-I. Levy of stamp duty on share falls within the state list and hence Payment of stamp duty on issue of shares is in accordance with the provisions of the Stamp Duty Act in respective states. The stamp duty on the issuance of shares is levied upon the value of shares, and where shares are issued in dematerialized form, the duty shall be levied on the amount of securities issued.
In the case of shares that are issued without being stamped or under stamped, the instrument which is under stamped becomes inadmissible as evidence before any authority and the document is charged with the full payment of the stamp duty as per the provision given in the act.
Stamp duty is paid on the market value of the share or the consideration whichever is greater and not on the face or nominal value of the shares purchased or transferred. Stamp Duty is levied at the rate of 0.25% of consideration i.e. the amount to be paid is 25 paise for a share transfer of Rs. 100. If required, the total amount of stamp duty will be rounded off to next or upper 5 paise.
Under 8A  of the Indian Stamp Act, securities issued in electronic form need not be stamped provided the issuer pays stamp duty on the total amount of securities issued. Also the transfer of registered ownership of share from a person to a depository or from a depository to a beneficial owner shall not be liable to any stamp duty. So, on online purchase of shares the total cost includes that stamp duty and other taxes (SEBI turnover fees, Service Tax, SEBI transaction Tax, Dividend Distribution Tax) which are levied by the government. The Stamp duty rate is 0.002% on non-delivery trade and 0.01% on delivery trade in Maharashtra.

 
STAMP DUTY ON TRANSFER OF SHARES
The shares of a company are movable property and are generally freely transferable.  Though there might be certain restrictions on transfer of shares of private companies provided in the articles of the company, such restrictions are generally added to protect the rights of one set of investors or the shareholders. However, shares of a public company are always freely transferable. Under section 56 of the Companies Act, 2013 a company will register a transfer of securities of the company (which includes shares), only when a proper instrument of transfer as per the format laid down in Form No SH. 4 (when such securities are held in the physical form). The form needs to be duly stamped, with adequate value, dated and executed by or on behalf of the transferor and the transferee.
It has been observed by the Court that, the stamps should be affixed before the delivery of the shares.  Since, transfer of shares comes under Schedule 7 entry 91, which is subject of the central government, the stamp duty in this regard is payable to the Central government.

STAMP DUTY ON GIFT OF SHARES
Transfer of shares as gift in the demat form does not attract any stamp duty. Whereas the stamp duty will be charged on the transfer of shares in the physical form even as gift. It will be at the same rate of 0.25%. Since, there is no consideration value for the gift transfer, the stamp duty is calculated on the market value on the date of transfer. The stamp duty is indifferent for the gift transfer to spouse or other relatives. Also, it is optional to register a gift deed for share transfer as per Indian Registration Act, 1908.  

DEBENTURE
The term debenture has been defined under Section 2(30) of the Companies Act, 2013 to include 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.  The term Debenture has not been defined under the Indian Stamp Act. The term “Debenture” has only been specified in List I of the Act.
In terms of the provisions of entry 91 of List I (Union List), only the Central Government has power to levy stamp duty on issue of debentures. The State Government can levy stamp duty only on transfer of debentures, not issue of debentures.
In terms of order bearing S. O. 2189(E) dated September 12, 2008, issued by the Department of Revenue, Ministry of Finance, it is required that the issuer will pay the stamp duty on issue of debentures, being a marketable security transferable (a) by endorsement or by a separate instrument of transfer (b) by delivery; at the rate of .05% per year of the face value of the debentures, subject to the maximum of 0.25% or Rs 25 lakh, whichever is lower. In terms of the provisions of this order, a company issuing debentures is required to pay stamp duty only if debentures are treated as “marketable security”. Hence, it is important to analyse the expression “marketable security”. The expression, "marketable security" is defined under Section 2(16-A) of the Indian Stamp Act, 1899 to mean a security of such a description as to be capable of being sold in any stock market in India or in the United Kingdom.
The term ‘security’ as used in the aforesaid definition of ‘marketable security’ has not been defined in the Indian Stamp Act, therefore, reference of the same can be taken from Securities Contracts (Regulation) Act, 1956. Sub-clause (i) of Clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 defines the term ‘security’ as follows: “Securities” include: (i) shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;”
The use of word stock market provides that the stamp duty has to be paid only with the company specified is a listed company. The court from time to time has changed it stance on whether the stamp duty is payable on the unlisted companies as well. When the debenture issued is a listed one then the stamp duty has to be paid and when it is not listed, the payment of stamp duty lies in the grey areas of law as per the various judgments of the court. The Bombay High Court in Dahiben Umedbhai Patel And Others vs Norman James Hamilton And Others  and Hon’ble Madras High Court in The Chief Controlling Revenue Authority (Stamp Act) vs Kamala Sugar Mills Limited held that, unlisted debenture issued by a company will not be considered as security and hence  Stamp duty in the same regard is not payable. While the Supreme Court in, Naresh K.  Aggarwala and Co. vs Canbank Financial Services Ltd. and Anr.  has taken a contrary view and held that the definition of ‘security’ does not distinguish between the listed and unlisted securities. In view of the aforesaid Supreme Court judgement, listed as well as unlisted debentures will be considered as ‘security’ as per the definition provided under the SCRA.

CONCLUSION
Stamp duty is paid on the market value of the share. It is payable to the state government while the shares of the company are issued. In case of purchase of share on depository form, i.e. D-Mat form, the transaction cost already includes the stamp duty, which is electronically paid by the seller. On transfer of shares, the stamp duty is payable only to the central government and in case of Depository form of transfer i.e. transfer through D-Mat there is no stamp duty applicable. The same conditions apply for gift of shares.
In case of Debenture, it depends on whether the debenture issued by the company is listed ot unlisted. It is a grey area as to applicability of stamp duty on the purchase and transfer of debenture.