Stamp duty on transfer of shares

Last Updated: 16 Oct 2024

According to the Indian Stamp Act, 1899, the Central Government levies stamp duty on the exchange of instruments, where an instrument is defined as any document by which any right or liability is created, or is purported to be created, transferred, limited, extended, extinguished or recorded. Under the Companies Act, 1956, stamp duty is payable when a transfer deed is executed for transfer of shares, which is done using Form 7-B.

Shares are moveable property

Section 44 of the Companies Act, 2013, mentions that shares shall be movable property, 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 this article, the provisions of the Stamp Act, as well as the Companies Act, are analyzed.

Legal framework for levy/payment of stamp duty

Why stamp duty is collected:

The main objective of the Stamp Act, 1899, is to raise revenue for the government. Instruments that are duly stamped as per Schedule-1 are admissible as evidence in a court of law. For this reason, documents stamped appropriately assume significance.

Field of legislation:

Vide 91 of the Union List, the central government is empowered to collect stamp duty on 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 the power to enact any laws for payment of stamp duty in respect to these instruments. Each state will prescribe a stamp duty on instruments that fall within its list (State List) and are reflected in Schedule-1A of the Stamp Act.

How stamp duty is calculated:

Identify which category the instrument or document falls under 3 categories:

• Stamp duty remains fixed irrespective of the value of transaction or goods/property mentioned in the instrument. For e.g., article of clerkship, copy of extracts etc.
• Stamp duty charges are entirely dependent on the value of the transaction mentioned in the document. For e.g., mortgage deed, security bond, etc.
• Stamp duty charges depend either on the value of the transaction mentioned in the document or on the true market value. For e.g., trust deed, partnership deed, etc.

Look up the rates provided in the Indian Stamp Act,1899,

Section 21 of the Indian Stamp Act of 1899 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 #62 which reads as under:

Article	Duty
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 a transfer from a trustee to a beneficiary, or from a trustee to another trustee, a concessional stamp duty is payable, unlike in normal transfers. Similarly, when a bank holds shares as security and gets them transferred in its name, a special concessional stamp duty is payable.

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 e.g., notarial acts, share transfer stamps. After the Telgi scam, franking of the value of the stamp on the instrument has come into usage. Having addressed the above basic framework on levy of stamp duty, let us now focus on the topic of stamp duty on transfer of shares.

Legal issues involved in the payment of stamp duty on transfer of shares

Folloing are the points

Who is liable to pay duty on transfer of shares?

Section 29 of the 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, 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 Valley Transport Ltd. (1958) 28 Comp. case 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 the transferee. (Mrs GR Parry vs. Union of India (1962) 32 Comp. case 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 the transferor has to bear the stamp duty. However, 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 favor.

Some companies follow the practice of asking for payment of deficit stamp duty and 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.

When is stamp duty payable?

According to Section 17 of the Stamp Act, stamp duty must be paid or stamps should be affixed before or at the time of execution of the transfer deed. Section 108 of the Companies Act, 1956, mentions no company shall register for a 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.

What does duly executed mean?

According to Section 2(12) of the 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 the prescribed form with date of presentation, other requirements such as particulars of the transferee, attestation by witnesses, date of execution, and payment of stamp duty must be complied with.

What does duly stamped mean?

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 canceled, 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. Kedar Nath Khetan (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 and no specific penalty is provided elsewhere in the Act.

Why is cancellation of stamps required?

Section 12 of the Stamp Act requires the person using 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 the mode of cancellation is not specified, it is acceptable if the cancellation is done by writing one initials or name on the stamp or by writing canceled 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).

What does the value of stock or average price of value mean?

In the case of listed companies, it is not a problem as the market value of securities is easily available for determining the payable stamp duty. However, in the case of a private, unlisted companys shares, how will one arrive at the value or average price of shares? 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.

What will be the recourse if an 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 an invalid instrument can be averted.

Transfer of shares in electronic form

After the Depositories Act came into existence, the Indian Stamp Act was amended to insert Section 8A. According to this new section, securities issued in an 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 shares from a person to a depository, or from a depository to a beneficial owner, shall not be liable for any stamp duty. Similarly, transfer of beneficial ownership dealt by Depository shall not be liable for stamp duty under Article 62 of Schedule-1.

Conclusion

Physical transfer of shares has lost significance in this age of electronic transfers through depositories. However, one must remember that it would be very risky if the shares are registered even when the instrument of transfer is not duly stamped. Still, many companies shares are in the physical form although SEBI has mandated them to make them demat. Hence, one cannot ignore the importance of checking and ensuring that proper stamp duty is affixed or franked to avoid being caught for the wrong reasons.