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In any transaction that is negotiated, one of the key elements that forms a part of the negotiations is who would pay the government taxes and duties for the transaction, and this is especially true for transactions involving immovable property wherein the stamp duty forms a substantial component of the entire consideration amount. If we are to try to define stamp duty, it can be defined as a tax that is levied on legal documents pertaining to transactions such as transfer of property.
Stamp duty, in the form of the tax we see in the modern world original in early 1600s Spain. From there, it spread to countries such as Denmark, England, France, Prussia and Netherlands over the next century and gradually spread over the rest of the world through the imperial routes of colonisation and trade. One great example of this is introduction of the Stamp Duty in America, when the British Parliament passed the Stamp Act in 1765. This tax was imposed on all forms of printed paper right from newspapers to licenses and any other form of legal documents. At that time, the revenue collected from this imposition of stamp duty was utilised to fund the British troops that were positioned in America. Along with this, the revenue collected was also used to pay for the salaries of the British officials that were positioned in America in administrative capacities.
Over time, various specialised laws evolved, each one providing a complete and comprehensive set of rules regarding the transaction it regulates right from the inception of the agreement to how the disputes shall be settled, if and when they arrived. In such specialised legislative environment, the applicability of generalistic one size fit all concepts such as the stamp duty became slightly archaic and limited in application. However, given the importance of these rules, they still are preserved in certain transactions, and a prime example of that are the transactions involving the transfer of immovable property.
When approaching the concept of issues such as stamp duty, the first question one asks is what is the rationale behind the imposition of and more importantly the payment of stamp duty. If we are to look at the transactions on which this duty is levied, it can be seen that most of these transactions are between two private parties, wherein, there is some form of transfer of title, either temporary or permanent, from one party to another, which may include the transfer or retention of the physical possession and easements that come with the property. Thus, the question arises, when the two parties that are regulated by law, enter into a transaction, and any gains made by either of the parties through such transaction would be separately taxed, why is there a need for the private individuals to pay additional tax just to effectuate the transaction that would cause the transfer of the title from one party to another. The answer to this can be found in the history books as well. If we are to look at the history of taxation regimes that have evolved around the globe, it can be seen that when stamp duty as a concept was created and applied, the taxation regimes in most jurisdictions were very primitive and highly limited. Further, in the early 1600s the concept of “tax” was still viewed as something that was paid by the common man to the state, and also the church in some cases. It was viewed as the oppressive technique of robbing the common folk of their money in the name of the state while those of the likes of the clergy and nobles would go away scot free. Thus, there was a need for a system that would be applicable universally based on the transaction and not on the parties involved in the transaction. Further, it was also the time when most of the European colonizers were starting to massacre the world with centuries of war, and thus needed additional revenue to support their fleets. Further, the taxation systems in those times were not as sophisticated as now and thus a universal concept of stamp duty was created which would act as a form of tax on any sort of transaction that would be entered into by two parties.
If we are to look at the history of stamp duty in India, we have to look at the Indian Stamp Act of 1899 which was passed by the British Parliament while India was still a colony. The provisions of this act were fairly comprehensive encompassing all kinds of transactions that could be entered into and form of duty that could be imposed on such transactions. For example, this act envisioned the taxation regime that would be implemented on transactions such as insurance, especially sea insurance as ships were used as the primary transport of inter continental trade. Further, this act also envisioned regimes on transactions involving debentures and securities as well as transactions involving the transfer of immovable property. Even though this act is over 100 years old, this act is still enforceable today. However, the act, with the passage of time has evolved in order to facilitate the transactions that are involved into today. One of the key salient features of this is the introduction of stamp paper under the stamp act wherein. The stamp paper is a document issued by the government which has a fixed value, and the value of the stamp paper would be assumed to be the stamp duty that is paid on the transaction executed on such stamp paper.
Though there is a central legislation in the form of Indian Stamp Act, 1899, the point of imposition of stamp duties falls under the states jurisdiction and thus, states are allowed to pass their own specialised legislations on this subject. In the state of Maharashtra, this is in the form of the Maharashtra Stamp Act. Originally passed as the Bombay Stamp Act in 1958, it repealed the applicability of the Indian Stamp Act in the jurisdiction coming under this act.
As seen in the earlier section, in the modern times, the relevance of the stamp act is mostly limited to transactions involving the transfer of immovable property. Chapter II of the Maharashtra Stamp Act mainly covers most of the provisions with regards to the imposition of stamp duty. While part A of the Act (Ss.3-9) deal with the instruments on which such duty might arise, Part B (Ss. 10-16) deals with Stamps the modes of using them. In Part A, the Act provides for a distinction between instruments that would be used in various types of transactions and stamp duty that would be levied on each one of them. In these, Section 4 specifically provides for duty that would be imposed on Several instruments used in single transaction of development agreement, sale, lease, mortgage or settlement.
(1) Where, in the case of any development agreement, sale, lease, mortgage or settlement, several instruments are employed for completing the transaction, the principal instrument only shall be chargeable with the duty prescribed in Schedule I for the conveyance, development agreement, lease, mortgage or settlement, and each of the other instruments shall be chargeable with a duty of one hundred rupees instead of the duty (if any) prescribed for it in that Schedule.
(2) The parties may determine for themselves which of the instruments so employed shall, for the purposes of sub-section (1), be deemed to be the principal instrument.
(3) If the parties fail to determine the principal instrument between themselves, then the officer before whom the instrument is produced may, for the purposes of this section, determine the principal instrument
Provided that the duty chargeable on the instrument so determined shall be the highest duty which would be chargeable in respect of any of the said instruments employed.
As seen from this section, there are multiple documents that form a part of the transaction and each of these documents attract a separate duty at the time of execution. The importance of stamp duty is that it brings the legal backing and enforceability to a document. If we are to look at Schedule I, it provides for a long list of types of documents that are used in transactions for transfer of property and the stamp duty that is applicable on them based on criteria such as the type and size of property that is being transferred, the type of instrument and the value of the transaction itself.
Coming to Part B of Chapter II, it provides for the type of stamps that can be used and the transactions in which each of such stamps find their application. It also deals with the question of payment of stamp duty. While Section 10 provides for a general outline of how payments should be made, Section 10A contains special provisions for institutional organizations such that government bodies, Banks and Insurance companies, providing that the institutions falling under section shall only pay stamp duty through cash or in the form of demand drafts.
Pat C of Chapter II which spans from Section 17 to Section 19 provides for the point of time in a transaction when the stamp duty is to be paid for that particular transaction. In this, there is a distinction drawn between Section 17 and Section 18 based on where the instrument is executed vis. Section 17 provides for the time when stamp duty is to be paid when the instrument is executed within the state whereas Section 18 provides for the time when the stamp duty should be paid when the instrument is executed outside of the state. Section 19 contains a special provision wherein it provides for the creation of a special class of instruments that would attract a higher duty in the State of Maharashtra.
Part D which spans from Section 20 to 29 covers one of the most crucial aspect of this act, which is the valuation of the duty that would be applicable on a transaction. While the initial sections in this part deal with issues such as conversion of amounts in foreign currencies (Sec. 20), valuation of stocks and marketable securities (Sec. 21) and Effect of statement of rate of exchange or average price (Sec.22) the second half of the Chapter deals with the way the duty on the transaction is to be valued, be it in case of annuity (Sec. 26) or how transfers in consideration of debt or subject to future payments, etc., to be charged (Sec. 25). Section 27 specifically provides for how to ley duty on instruments, the subject matter of which is indeterminable in the categorical matrix provided for in the act. Further, Section 28 contains provisions for the facts that need to be set forth in the instrument that affect the duty would be applied on them while Section 29 provides for direction as to duty in case of certain conveyances.
Part E is the final part of Chapter II of the act, and contains the most important provisions from the perspective of the parties, i.e. who shall pay the stamp duty. While Section 30 provides for guidelines to determine who should pay the stamp duty, Section 31 provides for specific provisions with regards to the payment of stamp duty by financial institutions.
The next key aspect of this act is Chapter III which deals with Instruments that are not duly stamped. This ranges from Examination and impounding of instruments (Sec. 33) to Recovery of duties and penalties (Sec. 46) and everything that falls between this. The thing to remember about the provisions of Chapter III is that these provisions set out the offences that could be committed with regards to payment or rather non payment of stamp duty and how the authorities are to deal with these offences when detected including the penalties that could be applicable for such offenses.
On perusal of the definition of “conveyance” under the IS Act, it is understood that no distinction is made between movable and immovable property. Tangible movable property can be sold by delivery to the purchaser on receipt of the price without an actual conveyance, but if a conveyance in writing comes into existence, it is chargeable to duty as such. Intangible movable property such as actionable debt or goodwill has to necessarily be transferred under a written instrument and chargeable as conveyance. Whereas land/buildings are immovable property, machinery installed in a factory premises (fixed to the ground) can be considered as immovable property, depending on the degree and permanency of the attachment, and the purpose of installing and attaching the machinery. For instance, the sale of a fertilizer plant as part of a slump sale along with land and building, would be considered as immovable property if it was always intended that the plant remains permanently affixed to the land and building being transferred. Article 5 to the Schedule of the IS Act prescribes the stamp duty chargeable on an “Agreement or Memorandum of Agreement”. Article 5 further sub-classifies several categories on the basis of the subject-matter of an agreement prescribing specific duty applicable to a particular instrument. A residuary provision is provided under Article 5(c) wherein all such agreements not specifically provided for are classified and duty payable is separately prescribed. If a contract does not intend to operate as an immediate transfer of the sale of property, such instrument is required to be stamped as an agreement rather than a conveyance. An agreement to sell a business undertaking with its assets including goodwill, would not amount to conveyance but would be merely a contract to sell, although the parties intended that when the transaction was completed, it should take effect from the date of the agreement and although in order to effect the contemplated sale, no actual deed of conveyance was prepared subsequently with regard to goodwill and movables (a sale deed being executed only in respect of immovable property).
Unless proper stamp duty is paid, documents executed may expose the Executants to huge penalty and also face the risk of court not accepting it as evidence. It is therefore important to check the relevant article in Schedule-1 or 1A of the states to ensure that proper stamp duty is paid at the time of execution of instrument.
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