Draft Stamp Bill = More Stamp Duty?

Wow, it’s legislation rewrite season! The DTC, Companies Bill and now the Indian Stamp Act is all set to get a makeover! Recently, the Finance Ministry released a draft Indian stamp bill, a document intended to replace the over 100-year old IndianStamp Act. The draft bill is currently open for public comment, and Isha Dalal is making the most of that opportunity.

India… land of diverse cultures… traditions… and stamp duty!

Today, 6 out of the 28 Indian states have enacted their own stamp duty laws, the remaining 22 follow the Indian Stamp Act, but some of them levy different stamp rates. That's about 10 different rates and many different interpretations. At the very least, a newstamp act will offer certainty and commonality.

Amrish Shah, Partner, EY

I think they are also saying that they want everybody to come to a common rate and that is where the entire process is leading to. So this is the first step in that direction and hopefully it will help.

Bomi Daruwala, Partner, Vaish Associates

Over the years the state governments have been trying to increase their revenue by way of stamp duty and as a result they have been trying to bring more and more instruments within their purview. Now that has been easier to do with states which have specific legislations like the state of Maharashtra, and it has been difficult in cases where the states have adopted the IndianStamp Act. So definitely it is going to benefit the states which have adopted the Indian Stamp Act if the new provisions are going to come into operation.

One of those new provisions is a change in the definition of ‘conveyance’—an instrument by which property is transferred.

The draft bill proposes to expand ‘conveyance’ to include ‘every order made by the High Court or Tribunal under Section 394 of the Companies Act, 1956 in respect of the amalgamation or reconstruction of companies’.

That means all mergers and acquisitions (M&A) and reconstruction activity will be subject to stamp duty.

That’s currently already the case for seven states—Mahastrashtra, Gujarat, Karnataka, Rajasthan, Madhya Pradesh, West Bengal and Andhra Pradesh. They all define 'conveyance'. It includes mergers and amalgamations and impose stamp duty accordingly. But for all other states, there have been different interpretations, contradictory court judgments and generally speaking, lots of confusion.

For instance, in the 2003 Gemini Silks case, the Calcutta High Court said that mergers are subject to stamp duty. Three years late, in the Madhu Intra case, the same court ruled the opposite. But last year in the Delhi Towers case the Delhi High Court held that mergers ARE stampable, although the act doesn’t specifically say so.

Experts say the definition proposed in the draft bill will finally clear the air!

Abhijit Joshi, Partner, AZB & Partners

To my mind the law was very clear. The definition of conveyance as it stood or as it stands in the Indian Stamp Act does include every instrument by which there is a transfer between two parties. A court order would be included in that. However as a matter of practice, it was not specifically provided in the definition, certain states did not insist on stamping it. And there was a spate of judgments, which came saying that an amalgamation or demerger—is it transfer? Is the transfer by operation of law covered? And I think it got settled to say that yes, which is the correct law. But I think this amendment will put this controversy to rest. The law was clear even before but now even the play on interpretation goes away.

But problems persist with the calculation of stamp duty on mergers.

The draft bill echoes existing law to say that conveyance should be stamped at ‘…5% of the market value of the property which is the subject matter of conveyance…’

But the Bombay, Gujarat and Karnataka stamp acts, on the other hand, levy stamp duty of 10% on the value of shares being transferred, instead of on the value of property.

Experts believe that the draft bill should also tax shares, and not the underlying property.

Ashok Gupta, Group Legal Counsel, Aditya Birla Group

M&A cannot be treated at par with transaction for selling immovable property because it is a business and the valuation of business is not based on assets per say (it may be a factor), but there are a number of factors, for instance, market price, if it is a listed company, or future earnings. Take the case of a BPO, all their valuation on stock exchange is based on future earning and their asset base is very low. So how would you tax merger and amalgamation similar to that for sale and purchase of immovable property? So there is a problem.

Abhijit Joshi, Partner, AZB & Partners

It will certainly increase chances of play, manipulations in terms of what are immovable properties, what is the value of immovable property, what are movable, have they been transferred by delivery. So all those interpretations will come, which could have been avoided by stamping the shares.

That problem has been further aggravated by a proposed definition of 'immovable property’.

Existing law does not define immoveable property. That has allowed many companies to tag immovable property as moveable. And since moveable property can be transferred without an instrument, companies escaped the stamp duty.

Some states, that have adopted their own stamp laws, such as Maharashtra, Gujarat and Karnataka, have defined immovable property. And now the draft bill has done the same by proposing that immovable property includes ‘…things attached to the earth or anything permanently fastened to anything attached to the earth…’

Thereby closing the door on a highly litiguous issue and plugging a gap that India Inc often used to reduce its stamp duty burden.

Bomi Daruwalla, Partner, Vaish Associates

Technically, a plant and machinery embedded in the earth is immovable property, but people have been taking various arguments. They say it’s not permanently embedded in earth, there are nuts and bolts, you can remove the nuts and bolts. I’ve even seen cases where even photographs have been taken of dismantled machinery and trying to say that it is not part of land and buildings. So now it is clarified that all these things which people do to avoid paying stamp duty on plant and machinery along with factory land and building will not work.

Quite clearly, this draft bill could mean a higher stamp duty incidence for companies. But the hope is that states, enthused by a modern and more remunerative law may agree to common rates and thereby provide uniformity to India Inc.

Source- http://www.moneycontrol.com/news/management/draft-stamp-bill-=-more-stamp-duty_467812.html