Stamp Duty Legislation and its Significance in State Revenue
With an outgrowth in mergers and amalgamations happening across the Indian market, the State Government has been exercising its power to levy specific stamp duties on these transactions under the Indian Stamp Act, 1899. The Hon'ble Supreme Court of India has classified mergers, demergers, amalgamations, and other corporate transactions within the category of 'conveyance', defined under Section 2(10) of the Indian Stamp Act, 1899 and has provided that State Government may prescribe/levy specific stamp duty rates in different States based on market value of the property being transferred. However, ongoing ambiguity regarding the interpretation of the provisions of the Act continue, thereby causing great concern for market players.
Stamp duty serves as a significant revenue source for State Governments. Inconsistent application of stamp duties on different transactions in different states may potentially lead to the concentration of setups in specific states favoring no stamp duties on particular transactions.
Understanding Stamp Duty and its Relevance in Corporate Transactions
For the sake of simplicity, stamp duty may be understood as a transaction tax paid to the government for upholding the enforceability of any document or transaction executed by a natural or legal person. Presently, the Indian market is at its all-time high, feeding the aspirations of industries and companies looking to invest funds in different companies through an easy investment getaway. There has also been an incredible increase in mergers and acquisitions within India's market scenario.
India, developing at a rapid scale is conveniently posing as a lucrative option towards higher and greater returns through public investment in the recent times. With the motto of bigger risk, better results, there has been a substantial increase in corporate transactions including mergers, amalgamations, demergers, divestments, etc. all of which require to be put down onto the paper to inflict enforceability. To be able to ensure smooth processing of these corporate transactions, there is an urgent need for listing and evaluating stamp duty of different corporate transactions, mainly to avoid concentration of transactions in a particular jurisdiction.
Judicial Clarifications on Stamp Duty in Mergers
The Hon'ble Supreme Court addressed the confusion concerning the applicability of stamp duty on merger transactions in the landmark judgment of Hindustan Lever & Anr. vs. State of Maharashtra & Anr.1 Answering in the affirmative for payment of stamp duty in the relevant corporate transaction, the Hon'ble Court ruled in favour of the State, upholding that "they are competent to levy stamp duty on court orders approving proposed merger transactions, and court orders sanctioning mergers are covered under the definition of 'instruments' as well as 'conveyance' provided under the stamp legislation in India."
Another pivotal observation made by the Hon'ble Court in the aforementioned case pertained to the definition of 'instrument' or 'conveyance' provided under Section 2 (10) and Section 2 (14) of the Indian Stamp Act, 1899, or the definitions provided under state legislations, need not explicitly mention 'merger transactions'. A closer look at the prevailing tax statutes in India supports the 'strict interpretation' of provided legislation as opposed to a 'liberal' one. Examining and interpreting the definition of 'instrument' and 'conveyance' does not explicitly include 'merger transactions'. However, the language of the definition provides scope to include other transactions and make stamp duty payable on such transactions that may consist of a transfer of liability, power or money within the same being 'inclusive' and 'wide'.
Case Study: Ambuja Cements vs. Collector of Stamps2 and the 1937 Notification
To simplify the corporate restructuring scenario in India, State Governments have repeatedly revised the duties relating to mergers, demergers, amalgamations, restructuring, divestments, etc. One of the recent instances that triggered such confusion was the decision of the Hon'ble High Court of Delhi, wherein a writ petition was filed by Ambuja Cements Ltd. (Petitioners) challenging the imposition of stamp duty onto a merger approved by the Hon'ble High Court in 2011. This was done in pursuance of a show cause notice issued by the Authority demanding the payment of stamp duty onto the transaction of merger in 2014.
The aforementioned petition was filed in view of the judgment passed by the Hon'ble Court in the case of Delhi Towers Ltd. v. GNCT of Delhi3, to seek clarity over the fact of whether the involved merger transaction was exempt from the payment of stamp duty. The 1937 notification of the Central Government provided certain exceptional circumstances wherein the payment of stamp duty could be avoided. One such scenario included a merger between subsidiary companies belonging to the same parent company. The 1937 notification read that exemption from stamp duty could be provided in cases where,
"1. at least 90 per cent of the issued share capital of the transferee company is in the beneficial ownership of the transferor company, or;
2. where the transfer takes place between a parent company and a subsidiary company one of which is the beneficial owner of not less than 90 per cent of the issued share capital of the other, or;
3. where the transfer takes place between two subsidiary companies of each of which not less than 90 per cent of the share capital is in the beneficial ownership of a common parent company".
Deciding upon the applicability and validity of the 1937 notification, the Hon'ble High Court of Delhi observed that the exemption of stamp duty on transactions between two subsidiaries of a common parent company is legitimate, applicable and binding. Reliance was also place on the previous decision of the Hon'ble High Court of Delhi in the case of Sandy Estates Ltd. v. Landbase India Ltd.4
Challenges and Recommendations for a Unified Stamp Duty Framework
The varying rates and interpretations of stamp duty across different States of India reflect gaps in the existing stamp duty governing framework. These inconsistencies necessitate immediate legislative attention to standardize the application of stamp duty that will further help stabilize the corporate restructuring regime of India. The decision of the Hon'ble High Court of Delhi highlighted a loophole within the proper governance of stamp duty regime in India. Different rate of stamp duty and no unanimous decision regarding extent of stamp duty on different transactions across different States requires immediate attention of the Legislature. With the growing corporate restructuring scenario, better clarity and a clarified governing framework would enable faster transactions and its execution in pace with the growing economy. This will also ensure no concentration of these corporate restructuring transactions in specific States, creating confusion in the mind of public.
A Call for Clarity and Reform
Stamp duty plays a vital role in boosting State revenues, but the lack of consistency across States has caused unnecessary legal confusion and economic disparity. Needless to state that such disparity has also been acknowledged by the Union on various occasions. With corporate restructuring on the rise, the current fragmented approach to stamp duty no longer fits the needs of a growing economy like that of India's. While courts have provided some clarity, relying on judicial decisions for such critical matters is not sustainable.
There may be a need for policies of guidelines which are unambiguous, unified, and seek to standardize stamp duty rates and interpretations across the country. While this may require a strict coordination between the Central and the State Governments, achieving a simplified law may ease the complications arising within the market and further ensure fair revenue distribution among States. Additionally, such a unified approach may promote consistent implementation and help maintain a uniform revenue flow of revenue across various states. A streamlined framework will also accelerate corporate transactions, reduce regional imbalances, and position India as a more attractive destination for global investments.
Footnotes
1 Hindustan Lever & Anr. v. State of Maharashtra & Anr., (2004) 9 SCC 438.
2 Ambuja Cement Ltd. v. Collector of Stamps, W.P. (C) 5638/2014.
3 Delhi Towers Ltd. v. GNCT of Delhi, CA No. 466/2008 in Company Petition No. 50/2003.
4 Sandy Estates Ltd. v. Landbase India Ltd., 1997 VI AD (Delhi) 981.
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