Stamp duty on transfer of shares
Transfer of shares implies transfer of ownership of shares. In this article, GS Rao points out the provisions of Stamp Act as well as Companies Act
According to the Indian Stamp Act, 1899, stamp duty is payable on instruments. An instrument has been defined as any document by which any right or liability is created or purported to be created, transferred, limited, extended, extinguished or recorded. Share transfer From 7-B is an instrument of transfer and stamp duty is payable when a transfer deed is executed for transfer of shares.
Shares are moveable property
The Section 82 of the Companies Act mentions that shares are movable property and transferable in the manner prescribed by the Articles of Association of the company. Shares of public limited companies are freely transferable. A duly executed and stamped transfer deed transfers ownership of shares by delivery of transfer deed along with share certificate.
In olden days blank transfers were prevailing and the instrument of transfer is never stamped by the executants i.e. (transferors). In this article the provisions of Stamp Act as well as Companies Act are analysed.
Legal frame work for levy/payment of stamp duty
a. Why stamp duty is collected: The main objective of Indian Stamp Act, 1899 is to raise revenue for the government. The instruments which are duly stamped as per Schdule-1 are admissible as evidence in a court of law. For this reason, stamping of document with correct value assumes significance.
b. Field of legislation: Vide 91 of Union list, the central government is empowered to collect stamp duty of certain instruments namely, bills of exchange, promissory notes, transfer forms for transfer of shares, debentures, bills of lading, proxies, letters of credit and receipts. State governments do not have any power to enact any laws for payment of stamp duty in respect of these instruments. Each state will prescribe stamp duty on those instruments which fall within its list and they are reflected in Schedule-1A.
c. How stamp duty is calculated: The instruments mentioned in Schedule -1 can be classified into three types. The first category refers to those instruments on which stamp duty as mentioned in the Schedule-1 is payable irrespective of the value mentioned in those documents. For instance: Memorandum of Association of a company, Notarial Act, etc. The second category attracts stamp duty on the basis of value specified in those instruments for eg, gift deed, lease deed. The third category attracts stamp duty on the basis the consideration mentioned in the documents or market value whichever is higher. For eg: Sale deed, transfer deed, etc.
d. How stamp duty is payable: Non judicial stamp papers are generally used for execution of legal documents such as sale deed, lease deed, etc. In some cases adhesive stamps are used for eg: Notarial acts, share transfer stamps. After the Telgi scam, franking of the value on the instruments has come into usage. Having addressed the above basic legal frame work on levy of stamp duty, now let us focus on the main issue of stamp duty on transfer of shares.
Legal issues involved in payment of stamp duty on transfer of shares
a. Who is liable to pay duty on transfer of shares?
The Section 29 of Stamp Act says that in the absence of an agreement to the contrary the expenses of providing the proper stamp shall be borne, in the case of transfer of shares of an incorporated company or other body corporate, by the persons executing the document.
In the case of transfer of shares of a company it is the seller who is responsible for payment of stamp duty (Union of India vs. Kulu ValleyTransport Ltd. (1958) 28 Comp. cas. 29).
The transferee is not liable for stamp duty simply because an instrument of transfer of shares is required to be executed both by the transferor and transferee. (Mrs. G.R. Parry vs. Union of India (1962) Comp. cas. 145). Section 17 of the Stamp Act makes it clear that any instrument chargeable with duty, should be stamped before the instrument is signed. Thus it indicates that transferor has to bear the stamp duty. But in practice we notice that it is always the transferee who affixes the share transfer stamps on the instrument at the time of lodging the same for registration of transfer in his favour.
Some companies follow the practice of asking for payment of deficit stamp duty and they remove the defect after money is received. Some may defend this action as an investor service. It would be legally correct, if a defective transfer deed is returned with a memo.
b. When stamp duty is payable?
According to Section 17 of the Stamp Act, the stamp duty must be paid or stamps be affixed before or at the time of execution of the transfer deed. The Section 108 of the Companies Act, 1956 mentions no company shall register transfer of shares unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and the transferee has been delivered to the company.
c. What duly executed means?
According to Section 2 (12) of the Indian Stamp Act ‘executed’ means ‘signed’. Therefore, ‘execution’ includes the signatures of all persons who are required to sign the instrument of transfer namely—transferor and transferee. To be a called a duly executed transfer deed, besides the signatures of the transferor and transferee on prescribed form with date of presentation, the other requirements such as particulars of transferee, attestation by witnesses, date of execution and payment of stamp duty must be complied with.
d. What duly stamped means?
There is no definition of ‘duly stamped’ in the Companies Act. There are case laws which have clarified the meaning of duly stamped and we are to be guided by such judgments only. When franking was not available adhesive stamps with the words ‘share transfer’ were used. If adhesive stamps are used they must be cancelled otherwise, the instrument will not be considered as a duly stamped and duly executed instrument and a company can refuse to register transfer of shares. Supreme court in the case of Mannalal Khetan Vs Kedanath Ketan (AIR 1977 SC 536) considered the issue whether provisions of Section 108 are directory or mandatory. It held that provisions contained in Section 108 are mandatory as Section 629-A of the Act prescribes the penalty where no specific penalty is provided elsewhere in the Act.
e. Why cancellation of stamps is required
The Section 12 of Stamp Act requires the user of adhesive stamps to cancel them so that they are not used again. This cancellation has to be done at the time of affixation or execution of the instrument. Although mode of cancellation is not specified, it is acceptable, if cancellation is done by putting initials or writing name on or use of words ‘cancelled the name or initials of across the stamps’. Moreover if such cancellation is not done, the instrument will be deemed to have been unstamped. (Readers may refer to case law Muniamma Vs Arathi Cine enterprises (P) Ltd).
f. How stamp duty is calculated?
There is no provision in the Companies Act which prescribes the rate of stamp duty. It is only the Stamp Act which mentions the rate of stamp duty. Section 21 of the Indian Stamp Act states that where an instrument is chargeable with ad valorem duty in respect of any stock or of any marketable or other security, such duty must be calculated on the value of such stock or security according to the average price of the value thereof on the date of instrument. The relevant Article in Schedule -1 is Article 62 which reads as under:-
|62. Transfer (whether with or without consideration)-
(a) of shares in an incorporated company or other body corporate;
|25 paise for every Rs. 100 or part thereof of the value of the share|
|(e) of any trust-property without consideration from one trustee to
another trustee or from a trustee to a beneficiary
|Rs. 5 or such smaller amount as may be chargeable under clauses (a) to (c) of this Article.|
In the case of transfer from a trustee to a beneficiary or trustee to trustee, a concessional stamp duty is payable unlike in the normal transfers. Similarly when a bank holds shares as security and get them transferred in its name, special concessional stamp duty is payable.
g. What does value of stock or average price of value mean?
In the case of listed companies, it is not a problem as market value of securities is easily available for determining the stamp duty payable. However in the case of private unlisted company’s shares, how the value of shares/ or average price will be arrived? This is a grey area. Stamp duty in these cases must be calculated on the average price based upon previous transactions available in the records of the company. If such transactions are not available, one has to rely on the fair value of the shares or the actual consideration, whichever is higher.
h. What will be the recourse if instrument is under stamped?
In case of doubt, the Collector can be approached who will act as an adjudicator u/s 31 and the charge of under stamping and the issue of invalid instrument can be averted.
i. Transfer of shares in electronic form
After the Depositories Act came into existence, Indian stamp act inserted Section 8A. According to this new section, securities issued in electronic form need not be stamped provided the issuer pays consolidated stamp duty on the total amount of securities issued. Also 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. Similarly transfer of beneficial ownership dealt by Depository shall not be liable for stamp duty under Article 62 of the Schedule-1.
Although physical transfer of shares has lost significance in this age of electronic transfers through depositories, one must remember that it would be fatal, if shares are registered when instrument of transfer is not duly stamped. Still many company’s shares are in physical form although SEBI has put them in the compulsory demat list. Hence, one cannot ignore the importance of checking and ensuring that proper stamp duty is affixed or franked to avoid company being caught for wrong reasons.
The writer is the deputy general manager-legal at OCL India Ltd.
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