INDIA BUSINESS WORLD - JANUARY 2006
THE MONTH THAT WAS

The Maharashtra government has agreed to scrap stamp duty on government security deals after a meeting with senior bankers.
The duty structure is being reviewed since banks and the country's biggest financial institution LIC are required to make substantial investment in gilts. As per statutory requirement, banks have to invest 25% of their deposits in gilts, while LIC has to put in over 50% of its premium income in government bonds.
Bankers had told the state that a duty would cripple the bond market where deals are cut on wafer thin margins. Industry circles said plummeting volumes could also affect the government's borrowing programme.

The state, however, will charge a stamp duty on loan agreements, though there is a distinct possibility that the rate could be lowered. The state government is non-committal on banks' representation to withdraw duty on corporate bonds and other debt instruments.

The government will notify the revised duty structure soon. Earlier, the Maharashtra stamp office had insisted that stamp duty would be levied on transactions in shares, bonds as well other debt instruments, besides various loan agreements between banks/institutional lenders and borrowers. There was more shock when banks were asked to fork out unpaid duty for the past 10 years.

Banks had argued that under the present law, no stamp duty is applicable on securities held in dematerialised form. At one stage this applied only to stocks, but successive amendments had extended the exemption to debt securities as well.