INDIA BUSINESS WORLD - FEBRUARY 2007
The Month that was ...

CENTRE MAY ISSUE STAMP DUTY RATE FOR BONDS

A Parliamentary committee is likely to meet shortly to take up the issue of imposing uniform stamp duty on the issue of bond paper, a suggestion that was made by the expert committee under RH Patil. As of now, stamp duties levied on financial instruments including debentures and promissory notes vary across states. This results in some states being preferred over others for the purpose of registering deeds, for issuing debt paper.

"Stamp duties levied at the time of issue, reissue and transfer of bond paper vary across states. A state parliamentary committee will be meeting to discuss implementation of a uniform rate of stamp duty," an official in the ministry of finance said.

In fact, state governments have already granted an in-principle approval to rationalise stamp duty on a host of financial instruments including debentures and promissory notes. A sub-group set up by the standing committee of finance secretaries on stamps and registration has recommended uniform stamp duties on the financial instruments across all states.

A move to rationalise stamp duty rates and impose uniform rates will have to be implemented through an amendment in the Indian Stamp Act. As per the Act, the stamp duty on debentures is 0.375% ad valorem (as a percentage of the value of the issue). Promissory notes attract a duty of 0.05%. However, in the case of mortgages, stamp duties vary across states from 0.1% in Maharashtra to 0.04% in Delhi and Gujarat.

The RH Patil committee, set up by the ministry of finance to make recommendations for deepening the corporate debt market, had called for both rationalisation of stamp duties and a uniform rate across states in its report submitted in 2005.

It had mooted introducing a provision that stipulates a maximum amount of stamp duty payable in respect of a single issue. The committee, to encourage the issuance of debt paper of shorter tenure, had suggested the stamp duty be fixed on the basis of the tenor and issuance value.

The panel had suggested that the stamp duty rate should not exceed 0.05% of the face value of the debt per year (maturity) of the bond issue amount (across tenors), with a cap of 0.25% or Rs 25 lakh, whichever is lower. For example, the maximum stamp duty rate should be 0.25% ad valorem with a cap of Rs 25 lakh for a seven-year instrument.

Put simply, a bond with a maturity period of one year should attract a rate of 0.05% of the face value with a maximum cap of Rs 10 lakh while a bond exceeding a maturity period of one year should attract a rate of 0.05% of the face value per year with differing caps depending on the period of maturity with the maximum cap fixed at Rs 25 lakh.