INDIA BUSINESS WORLD - MAY - JUNE 2007
The Month that was ...

STATES FINALLY AGREE ON SINGLE STAMP DUTY RATE

Financial instruments like debentures and promissory notes will soon attract a uniform stamp duty across the country. At present, tax on financial contracts varies from state to state. The Centre and state governments have reached a consensus on going for a common duty, a long standing demand of India Inc.

The move would also cut the cost of raising debt funds in states that have a higher stamp duty. For instance, stamp duty in Delhi on security receipts is ten times that of Maharashtra's. A decision to impose uniform rates was taken by the committee of state finance secretaries earlier this week, said government sources. In the case of mortgages, for instance, stamp duties vary across states, from 0.1% in Maharashtra to 0.04% in Delhi and Gujarat.

The move will also end the rate arbitrage that a differential duty structure offered as a result of which some states are preferred over others for the purpose of registering deeds and for issuing debt paper.

A rationalisation of stamp duty rates in order to impose uniform rates will have to be implemented through an amendment to the Indian Stamp Act, likely to be introduced in the monsoon session of Parliament. According to the current version of 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%. These are maximum rates. The actual rates vary across states.

A recommendation to rationalise stamp duties and make them uniform across states was first made by the committee under RH Patil, the former managing director of the National Stock Exchange, in 2005.

States have agreed to implement the recommendations of the Patil Committee regarding stamp duty rates. The panel had mooted introducing a provision that stipulates a maximum stamp duty payable in respect of a single issue. Further, to encourage the issuance of debt paper of shorter tenure, it had been suggested that stamp duty be fixed on the basis of the tenor and issuance value.

Accordingly, states have agreed to levy a minimum rate of 0.05% which will go up depending on the tenor of the bond.

There will be a cap of 0.25% or Rs 25 lakh, whichever is lower. 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 fixed at Rs 25 lakh.