The government of India, through Finance Act, 2019, amended the Indian Stamp Act, 1899 (hereinafter called as Stamp Act).
The Articles of the Constitution that deals with the Stamp Act are Article 246 along with the Seventh Schedule and Article 268.
Article 246, along with Seventh Schedule, deals with the distribution of power between Centre and State. List- I, Union List, provides the matters on which Centre Government has absolute authority to make any laws. List-II, State List enumerates the matter on which the State Government has the absolute power to make any laws. List-III, Concurrent List, in respect of the matter enumerated in this list, both Centre and State Government have the authority to make laws.
In List-I, Union List, entry no. 91, provides that “Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts.” So it is clear that the centre government has the power to decide the rate of the stamp duty in respect of shares and debentures.
Further, Article 268 provides that such stamp duty as mentioned in the List-I, Union List, (Example, Entry No. 91, Stamp Duty on Bill of Exchange, Shares etc.) shall be levied by the Government of India, and collected by;
1. In case of Union Territory, by the Government of India, and
2. In case of any state, by the respective state government.
This distribution of power creates a unique problem with the amendment in the Stamp Act. Whereas, Section 9A of the Stamp Act, along with The Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 (hereinafter, called as Rules) provides that in case of securities transacted through a stock exchange or depository, stamp duty will be chargeable as per the rate specified in the Schedule I.
In the case of securities transacted through other than stock exchange and depository, the stamp duty shall be as per Schedule I.
The transaction is securities, including the issue of securities. However, it is not limited only to the issue of securities. It also includes a transfer of securities.
Rules very clearly provide that in case of securities referred in Section 9A, the power of collection vest with the stock exchange or clearing corporation in case of listed securities, and in case of securities dealt through depository by depositories.
Article 268 of the Constitution of India very clearly provides that those stamp duties as are mentioned in the Union List shall be levied by the Government of India but shall be collected—
(a) in the case where such duties are leviable within any 3 [Union territory], by the Government of India, and
(b) in other cases, by the States within which such duties are respectively leviable.
So the power of collecting stamp duty is with the state government for those stamp duties as mentioned in the union list.
Entry No. 91 of the Union List of Seventh Schedule of the Indian Constitution provides about the instrument in respect of which the stamp duties.
Entry No. 91, “Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts.”
As per the provisions of the Constitution of India Centre is not authorized to collect stamp duty, so by implication, it cannot further delegate such power either to the stock exchange, clearing corporation, or depositories, as the case may be, so such delegation under Section 9A will be subject to constitutional scrutiny and may be declared ultra-vires to the constitution.
The second challenge comes from Section 9A and 9B in both these sections, it is mentioned that the rate of duty in case of issue of securities shall be as per Schedule I.
However, as per Union List, the central government don’t have the power to prescribe a rate of duty in case of the issue of shares.
It is also important to note that State list directly don’t provide any kind of jurisdiction to the state government for levying stamp duty on the issue of shares. However, entry number 63 provide the state government with the power to specify stamp duty on documents other than those specified by in Union List.
Entry No. 63 “Rates of stamp duty in respect of documents other than those specified in the provisions of List I with regard to rates of stamp duty.”
So this rate, for the issue of shares specified in Schedule I, maybe challenged for constitutional validity.