The Indian Stamp Act, 1899 (Stamp Act) was amended in 2019 through the Finance Act, 2019 ('Amendment'), broadly to introduce a unified mechanism for the levy and collection of stamp duty on the issuance and transfer of securities. This was done through the insertion of Sections 4(3), 9A, 9B, 62A, 73A and Article 56A, among others.
The Amendment introduced a nationally applicable stamp duty framework prescribing 0.005% as the duty on the issue of shares, to be collected centrally through depositories. This marked a significant step in ushering in and strengthening the era of dematerialised issuance of capital market instruments.
More than five years after the Amendment, Delhi-based companies have begun receiving notices from the Delhi revenue department questioning the stamp duty paid on the issue of shares. The department has issued letters to depositories such as NSDL (National Securities Depository Ltd) and CDSL (Central Depository Services Ltd), asserting that stamp duty ought to have been paid at the rate of 0.1% on the value of shares issued, based on Article 19 of the Delhi Stamp Act. These communications disregard the 2019 Amendment and also prohibit depositories from collecting stamp duty on behalf of the state.
This move has triggered uncertainty over share issuances effected after 1 July 2020, when the amended Stamp Act came into force. The communications from the Delhi revenue department, seeking a duty rate 20 times higher than that approved by Parliament, directly challenge the uniform national regime. As a result, companies are grappling with compliance ambiguity and the risk of retrospective financial exposure, despite having followed the statutory mechanism enacted by Parliament.
If other states begin raising similar demands under their respective stamp laws, the intended harmonisation of stamp duties could quickly descend into a regulatory cacophony.
This article examines the objective of the 2019 Amendment and explores possible ways forward.
The Amendment: A Unified Scheme
Pursuant to the Amendment, Sections 9A and 9B were introduced into the Stamp Act. Section 9A is a non-obstante provision mandating that depositories collect stamp duty on behalf of the state government (SG) from the issuer, based on the total market value of the securities. Similar provisions apply to the sale or transfer of securities.
Section 9A(2) provides for the levy of stamp duty as per the rates specified in Schedule I. Currently, as per Article 19 read with Article 56A of Schedule I, the stamp duty on the issue of shares is fixed at 0.005%.
Notably, Section 9A(3) expressly prohibits state governments from levying or collecting stamp duty on instruments covered under Section 9A(1), including the issue, sale or transfer of shares. A plain reading of the provisions makes it clear that the intention was to unify the mechanism for levy and collection of stamp duty, while preserving the right of states to receive the duty. Depositories merely act as collection agents on behalf of the states.
Rationale for the Amendment
“Clauses 11 to 21 of the Bill seek to amend the Indian Stamp Act, 1899 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.”
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ministry of finance (MoF) press release dated 21 February 2019 further clarified that the Amendments were aimed at facilitating ease of doing business and ensuring uniformity and affordability of stamp duty across states. The Central government stated that the Amendments were enacted after due deliberation, in exercise of powers under Entry 91 of List I and Entry 44 of List III of the Seventh Schedule to the Constitution.
Further clarification on implementation was issued through a
press release dated 30 June 2020, reiterating that the Amendments were introduced after consultations with state governments. Similar guidance was also issued through an RBI press release dated 1 July 2020.
It is evident from these materials, as well as from the
Union Budget speech for 2018–19 delivered by the then finance minister, Arun Jaitley, that extensive consultations were undertaken with States prior to amending the Central law. Section 9A(4) specifically mandates that the
2019 Rules governing the collection of stamp duty through depositories be framed in consultation with state governments.
The Question of Constitutionality and Legal Principles
The issue now emerging raises questions of constitutionality. The Centre enacted the Amendments relying on Entry 91 of List I (rates of stamp duty on instruments including transfer of shares and debentures) and Entry 44 of List III (stamp duties other than judicial stamps, excluding rates of stamp duty).
However, the Delhi revenue department appears to be disregarding the Amendments, possibly on the following grounds:
- Entry 63 of List II covers 'rates of stamp duty' on documents other than those specified in List I, empowering states to determine such rates.
- Entry 91 of List I refers only to 'transfer' of shares and not the 'issue' of shares.
- Entry 44 of List III excludes 'rates of stamp duty' from the concurrent list, suggesting that Parliament lacks competence to legislate on rates.
- Depositories were allegedly not authorised by the Delhi government to collect stamp duty on its behalf.
While the constitutional question is complex and ultimately subject to judicial interpretation, until such determination is made, actions should be assessed against two settled legal principles: the primacy of Central law over State law and the presumption of validity of legislation.
Prevalence of Central Law over State Law
Where there is an inconsistency between Central and state law, the Central law prevails. Once Parliament legislates within its competence, particularly through a later and comprehensive framework, that law overrides conflicting state legislation. This is commonly referred to as the doctrine of repugnancy.
Applied here, the intent of the 2019 Amendment is unambiguous: to harmonise stamp duty on securities across India and eliminate state-level divergences that impede market efficiency.
Presumption of Validity of Law
It is also a settled principle that legislation enjoys a presumption of constitutionality unless struck down by a competent court. The burden of proving unconstitutionality rests on the challenger.
As the 2019 Stamp Amendments have not been invalidated by any court, they continue to operate with full legal force and stakeholders remain bound by the central framework.
Depositories as Statutory Collecting Agents
The contention that depositories require separate authorisation from individual state governments is misplaced. Depositories act as statutory collecting authorities designated by Parliament under the Act and the rules framed thereunder. Once Parliament prescribes the mode of collection, state consent is not required.
Could Companies Have Paid Any Duty Other Than 0.005%?
Operationally, no company issuing shares in dematerialised form has discretion in this regard. Depositories automatically calculate and collect stamp duty at 0.005% based on the consideration value. Issuers cannot alter this rate.
CDSL’s standard operating procedure (SOP) explicitly states that issuance stamp duty is applicable at 0.005% and that corporate actions cannot proceed unless the requisite duty is paid. The stamp duty calculators on depository websites also compute duty strictly at this rate.
Potential Steps for Companies
From the above discussion, it is clear that:
- The Amendment was enacted by the Central government
- It is later in time than the Delhi Stamp Act amendments
- It has not been declared unconstitutional by any court and
- The duty paid by companies was statutorily embedded in the centralised mechanism under Section 9A, leaving no discretion with issuers.
Accordingly, no fault can be attributed to companies that complied with the law as enacted by Parliament and implemented through depositories.
Companies receiving similar notices may consider the following steps, on a case-by-case basis:
- Respond to notices citing Section 9A and enclosing proof of duty paid through the depository;
- Seek clarification from the depositories and the ministry of finance;
- Consider approaching the High Court under Article 226 if coercive enforcement is initiated
- Assess whether disclosures are required in financial statements, depending on the nature of the notice and likelihood of enforcement.
Closing Remarks
The unified stamp duty framework introduced in 2020 represents a considered move towards centralised and harmonised collection of stamp duty on securities. The attempts by the Delhi revenue department to enforce pre-2020 state rates raise serious legal and constitutional issues and are likely to be tested through judicial scrutiny.
Until such determination is made, the presumption of validity operates in favour of the 2019 Amendments and compliance with the central framework remains legally binding.
(CS Sikha Bansal is a Senior Partner, while CS Nitu Poddar is a Partner at Vinod Kothari & Company)
