The Ministry of Finance had recently announced certain changes in stamp duty on financial securities which have come into effect from 1 July 2020. These changes were proposed to be implemented in April but were deferred to July.
1. Uniform stamp duty across India
Earlier, stamp duties varied between states. The central government has now imposed stamp duty of 0.005 percent on all transactions carried out by mutual funds, systematic investment plans, and daily stock traders, with effect from 1 July 2020, irrespective of state.
The Finance Ministry said that in order to build a pan-India securities market, the Indian Stamp Act, 1899 and Rules have been amended to create a legal and institutional mechanism that will enable states to collect stamp duty on securities market instruments at one place by one agency (through Stock Exchange or Clearing Corporation authorized by it or by the Depository) on one Instrument.
"A mechanism for appropriately sharing the stamp duty with relevant State Governments has also been developed which is based on the state of domicile of the buyer," the ministry's statement said.
The notification clarifies that stamp duty will be payable to the state in which the client and specifically the buyer in a transaction is located.
Mutual funds, being delivery-based transactions in securities, were supposed to have been paying the duty as per various State Acts. All mutual fund transactions are thus liable for stamp duty and the new system has standardized the charges across states and the manner of collection of stamp duty.
2. No multiple incidence of tax
In order to prevent multiple incidences of taxation, no stamp duty shall be collected by the States on any secondary record of transaction associated with a transaction on which the depository/stock exchange has been authorised to collect the stamp duty.
Further, in the new system stamp duty will be levied only on one side (payable either by the buyer or by the seller but not by both, except in case of a certain instrument of exchange where the stamp duty shall be borne by both parties in equal proportion).
For all exchange-based secondary market transactions in securities, Stock Exchanges shall collect the stamp duty.
Tax arbitrage is avoided by providing the same rate of stamp duty for issue or re-issue or sale or transfer of securities happening outside stock exchanges and depositories.
3. Stamp duty on off-market transactions
The finance ministry said that for off-market transactions (which are made for consideration as disclosed by trading parties) and the initial issue of securities happening in Demat form, depositories shall collect the stamp duty.
Earlier, no stamp duty was imposed on off-market transactions in Demat mode. Off-market transactions mainly include purchase and sale of unlisted shares and also other kinds of off-market transactions like gifts of financial securities.
Some investors used to circumvent stamp duty of 0.25 percent on transfer of unlisted shares in physical form by transferring the shares in Demat form.
4. Segment-wise stamp duty
According to the Finance Ministry's press release, there has been a reduction in duty for many segments. For example, the rate prescribed is lower for the issue of equity/debentures and for transfer of debentures (including re-issue) to aid capital formation and to promote the corporate bond market.
For equity cash segment trading (both delivery and non-delivery-based transactions) and options, since rates are to be charged only on one side in line with the new scheme, the ministry stated that 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 very lower rate from the existing rates. For the newly introduced ‘repo on corporate bonds', a far lower rate is specified, since similarly positioned repo on Government Securities is not subject to duty," the ministry said.
No stamp duty shall be chargeable in respect of the Instruments of transaction in stock exchanges and depositories established in any International Financial Services Centre set up under section 18 of the Special Economic Zones Act, 2005.