Dematerialised Shares And Stamp Duty: When Federal Disputes Burden Corporate India

Dematerialised Shares and Stamp Duty: When Federal Disputes Burden Corporate India

INTRODUCTION

The Finance Act, 2019 inserted sections 8A, 9A, and 9B into the Indian Stamp Act, 1899 ("ISA"), establishing a unified stamp duty framework for securities transactions. Effective July 1, 2020, this amendment mandated centralized collection of stamp duty on behalf of the State Governments through depositories and stock exchanges at the prescribed rate of 0.005% on share issuance. The legislative intent behind the amendment was elimination of jurisdictional disputes, prevention of rate arbitrage, reduction in compliance costs, ensuring single-point taxation and most importantly enhancing ease of doing business.

However, around five years later, between July-September 2025, the Delhi Government issued circulars demanding stamp duty at 0.1% on share issuances by NCT Delhi companies, a rate twenty times higher than the rate prescribed under the Finance Act, 2019. Companies that paid 0.005% through depositories now face notices for non-payment, with penalties extending up to ten times the applicable stamp duty at 0.1%.

The crux of the matter is not merely a rate differential. It raises a deeper constitutional question: can Parliament prescribe stamp duty rates on share issuances, or does that power vest exclusively in State Legislatures? While this awaits judicial determination, companies are trapped in a federal crossfire, facing dual compliance obligations, retrospective liabilities, and regulatory uncertainty.

THE CONSTITUTIONAL ALLOCATION OF STAMP DUTY POWERS

India's stamp duty regime operates within a carefully calibrated federal structure delineated by the Seventh Schedule to the Constitution:

On a prima facie view of the legislative competence of both Parliament and State Legislature, it appears that:

1. Parliament controls the stamp duty rates on the transfer of shares;
2. States control the stamp duty rates on the issuance of shares.

This division reflects the constitutional scheme of fiscal federalism, where taxation powers are distributed to prevent central overreach while ensuring state revenue autonomy.

THE FRAMEWORK UNDER THE FINANCE ACT, 2019

Section 8A: Duty on Issuance to Depositories

Section 8A(a) provides that when an issuer issues securities to depositories, it "shall be chargeable with duty on the total amount of securities issued by it and such securities need not be stamped."

This creates a legal fiction deeming the electronic credit of dematerialised securities as an "instrument" chargeable to stamp duty. While Parliament is competent under Entry 44 to create such a mechanism and to designate how and when duty is collected on issuance, it cannot prescribe rates on issuance which fall within State competence under Entry 63.

Section 9A: Collection Through Depositories and Exchanges

Section 9A establishes a tripartite collection mechanism on behalf of the State Governments:

• Clause (a): Stock exchanges/clearing corporations collect duty from buyers on exchange-based sales.
• Clause (b): Depositories collect duty from transferors on off-market transfers.
• Clause (c): Depositories collect duty from issuers on creation/change in depository records pursuant to share issuance.

Section 9A(2) provides that these transactions "shall be chargeable with duty as provided therein at the rate specified in Schedule I", prescribing 0.005% for issuance under Article 56A. Section 9A(3) further prohibits State Governments from collecting stamp duty on any document associated with such transactions.

Parliament may designate collection agents under Entry 44, but prescribing rates for issuance falls under Entry 63. Section 9A(1)(c), read with 9A(2) and Article 56A, arguably exceeds Parliament's legislative competence insofar as it imposes a 0.005% rate on issuance.

Section 9B: Issuances Outside Depositories

Section 9B prescribes that issuances occurring outside the depository framework attract stamp duty at Schedule I rates, payable by the issuer.

This provision suffers from the same infirmity, it prescribes rates for issuance, a subject falling within exclusive State competence under Entry 63.

THE DELHI GOVERNMENT CIRCULARS

1. Circular dated July 29, 2025 ("Circular 1") invoked Article 19 of Schedule I-A of the ISA (as applicable to Delhi), which prescribes 0.1% duty on document evidencing title of shares, irrespective of whether shares are in physical or dematerialised form. It directed NCT Delhi companies to apply for adjudication before the Revenue Department.

2. Circular dated September 29, 2025 ("Circular 2") directed NSDL and CDSL to stop collecting stamp duty at 0.005% from NCT Delhi companies and requires companies to pay 0.1% directly to the Delhi Government through the SHCIL e-stamping portal.

The Legal Basis of the Circulars

Article 19 of Schedule I-A of the ISA, as applicable to Delhi, prescribing 0.1% duty on documents evidencing title to shares, is a validly enacted state law provision. The key question is whether dematerialised shares generate an "instrument" for stamp duty purposes.

Section 2(14) of the ISA defines "instrument" to include "any document, electronic or otherwise, created for a transaction in a stock exchange or depository by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded." The term "recorded" is critical: an instrument need not create or transfer rights; mere recording of ownership suffices.

A BENPOS (Beneficiary Position) statement, which records beneficial ownership in a depository, is an electronic document that records rights in dematerialised shares. It therefore falls within this definition. The principle that stamp duty depends on substance, not form, is established in Ingram v. IRC (1986) 2 WLR 598, which held that courts must ascertain the substance of a transaction to determine chargeability. The substance of a BENPOS statement is that it evidences title to shares, precisely what Article 19 contemplates.

Therefore, Delhi Government's legislative competence to levy 0.1% duty on such instruments flows from Entry 63. The dematerialised form does not exempt share issuances from state stamp duty.

The Procedural Irregularity

While the substantive legal basis may be sound, Circular 2's directive to depositories to cease collection creates an operational impasse. Depositories are statutory agents under Section 9A of the ISA, obligated to collect duty on behalf of State Governments. The Circular effectively directs them to contravene their statutory obligation; a directive they cannot lawfully comply with without exposing themselves to penalties under Section 62A of the ISA.

THE COMPLIANCE CRISIS: PRACTICAL IMPACT ON CORPORATE INDIA

The constitutional debate, however, significant obscures a harsh ground reality: companies are suffering tangible harm while the central government and state governments contest their respective spheres of competence.

1. The Retrospective Compliance Trap

Circular 1 treats all past issuances on which 0.005% duty was paid through depositories as improperly stamped. Companies are directed to apply for adjudication and pay the stamp duty at the rate of 0.1% plus penalties. Under Section 40 of the ISA, penalties can extend to ten times the deficient duty.

2. The Dual Compliance Dilemma

Companies now face contradictory legal obligations:

• Under Section 9A: Depositories must collect 0.005% from issuers; failure exposes depositories to penalties.
• Under Circular 2: Companies must pay 0.1% directly to Delhi Government; failure invites penalties.

Which law should companies comply with? Compliance with one results in non-compliance with the other.

3. The Chilling Effect on Capital Formation

Sophisticated investors factor regulatory certainty and friction costs into valuation and deal structuring. A sudden twenty-fold rate increase, coupled with the threat of retrospective penalties, materially raises the cost of capital for NCT Delhi companies. This not only impacts individual issuers but undermines Delhi's broader entrepreneurial and startup ecosystem.

4. The Ripple Effect Across States

If Delhi's assertion of 0.1% stamp duty on dematerialised share issuances is sustained, other states like Maharashtra, Karnataka, Gujarat, and Tamil Nadu which prescribe duties similar to Delhi at 0.1% could issue similar circulars. The Finance Act's vision of a unified, single-rate regime would collapse, and India's securities market would fragment along state lines.

FEDERAL DISCORD IN MONETARY MATTERS

At its core, this controversy represents a challenging question of cooperative federalism. The Finance Act, 2019 sought a unified securities stamp duty regime. The Press Information Bureau release accompanying the Finance Bill, 2019 referenced a proposed Coordination Council under Article 263 to align Centre-State policy on stamp duty, however, no such Council was constituted before implementation.

On the other hand, Entry 63 of the State List, as recognized by the Supreme Court in State of Karnataka v. Ranganatha Reddy (1977) 4 SCC 471, vests States with exclusive power over stamp duty rates on documents not enumerated in Entry 91. This principle was further affirmed in Life Insurance Corporation of India v. The State of Rajasthan and Ors. (2024) 8 SCC 325, where the Supreme Court held that under Entry 91, Parliament has exclusive power to legislate on rates of stamp duty for instruments enumerated in that Entry, while under Entry 63, States have exclusive power to legislate on rates for all other documents.

Critically, in Life Insurance Corporation of India (Supra), the Supreme Court also observed that stamp duty must be levied as per the law in force as on the date of execution of the instrument. Applying this principle, companies that paid 0.005% duty through depositories in good faith, under a law they believed to be valid, cannot now be subjected to notices and penalties for past issuances. They complied with the mechanism prescribed by Parliament under Section 9A; any constitutional infirmity in that provision cannot retroactively convert their compliance into a punishable default.

As held in the case of D. Cawasji and Co., Mysore v. State of Mysore and Ors AIR 1984 SC 1780, imposition of tax at a higher rate with retrospective operation, must be justified on proper and cogent grounds. The Delhi Government's Circular 1, which seeks to collect the stamp duty at the rate of 0.1% on all past issuances without providing exemptions or transitional relief, lacks such justification and imposes an unreasonable retrospective burden on compliant taxpayers.

In the present scenario, Parliament, by prescribing the rate on issuance of shares through the Finance Act, 2019, appears to have exceeded its legislative competence under the Seventh Schedule. However, this must be read in consonance with the Statement of Objects and Reasons of the Finance Act, 2019, a matter that requires judicial examination. Conversely, the Delhi Government's exercise of its constitutional power under Entry 63, though legally grounded, is being applied retrospectively. This is a typical Centre-State dispute where both authorities have arguably overstepped: Parliament by prescribing rates on issuance, and Delhi by imposing retrospective liability without adequate safeguards.

"Ease of Doing Business" cannot remain a mere catchphrase in policy documents. It must be grounded in meaningful deliberation and genuine consultation between Centre and State before legislative action, not after commercial disruption. Regulatory reforms that lack inter-governmental coordination defeat their own purpose, transforming efficiency measures into compliance nightmares. The present controversy illustrates what happens when well-intentioned policy initiatives bypass the collaborative mechanisms. In State of Kerala v. Kurain Abraham (P) Ltd. (2008) 3 SCC 582, it was observed that the Government while imposing taxes must strike balance between collection of revenue and business friendly approach, a principle that demands cooperative federalism in practice, not merely in theory.

THE PATH FORWARD

For Policymakers:

1. Immediate Moratorium: The Delhi Government should impose a moratorium on penalty proceedings for past issuances pending judicial clarity.
2. Inter-State Council Mechanism: Operationalize the Coordination Council contemplated in the Finance Act, to negotiate mutually acceptable rates.
3. Legislative Clarity: If Parliament has competence to prescribe rates for issuance, enact clarificatory legislation. If Parliament lacks such competence, amend section 9A of the ISA.
4. Transitional Provisions: Exempt all issuances prior to the Circulars from retrospective liability and apply enhanced rates prospectively only.

For Companies:

While judicial determination of the issue is inevitable and policy-level resolution is essential, companies cannot remain passive awaiting governmental action. Immediate steps are necessary to protect commercial interests:

1. Deliberate on Strategy: Assess the financial and operational impact of dual compliance. Evaluate whether to challenge the Circulars through writ proceedings or seek administrative relief through adjudication. Consider forming industry coalitions to pursue collective legal remedies.
2. Seek Legal Advice: Engage specialized legal advisors to analyze company-specific exposures, including past issuances, pending transactions, and prospective fundraising plans.
3. Engage Revenue Authorities Proactively: Seek written clarification on (a) treatment of duty already paid at 0.005%, (b) avoidance of double taxation, (c) exemption for past transactions, and (d) penalty waivers for bona fide compliance.
4. Document Forensically: Maintain detailed records of all share issuances, depository communications, duty payments, and legal opinions to demonstrate good faith compliance.

CONCLUSION

The dematerialised share stamp duty controversy is not an academic debate about constitutional entries. It is a live regulatory crisis affecting thousands of companies, millions of shareholders, and billions of rupees in capital formation.

The Union's unified, technology-enabled regime is administratively sound and economically rational. The Delhi Government's assertion of constitutional power under Entry 63 is legally defensible and consistent with fiscal federalism. Both positions have constitutional merit, but legal correctness without operational workability serves no one. Companies cannot comply with contradictory mandates. Investors cannot deploy capital amid regulatory uncertainty.

The dissonance between legislative intent and ground-level implementation is stark. Parliament, through the Finance Act, 2019, sought to eliminate the very fragmentation and jurisdictional disputes that have now resurfaced. The Statement of Objects and Reasons explicitly articulated the goal of creating a zero-evasion collection mechanism to prevent multiple incidences of duty and promote ease of doing business. Yet, the absence of prior consultation with State Governments and the failure to operationalize the contemplated Coordination Council has negated these legislative efforts. What was designed as a remedy has now become the malady.

The exigency is not to determine who is right Union or State but ensuring that pending such determination, the corporate sector is not penalized or paralyzed. Resolution may require judicial intervention, legislative amendment, or negotiated settlement. What is non-negotiable is that interim relief and operational clarity cannot await constitutional litigation. India's securities market, built over decades of reform, cannot be held hostage to a federal standoff over stamp duty rates. Cooperative federalism demands that Union and States negotiate solutions respecting constitutional boundaries while protecting commercial interests. Until then, companies remain collateral damage in a constitutional dispute not of their making and beyond their capacity to resolve.

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