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Stamp Duty on Dematerialised Shares | Delhi Government Circular | Indian Stamp Act 1899 | Constitutional Validity | ISA 2019 Amendments
- Executive Summary
Recent circulars issued by the Department of Revenue, Government of NCT of Delhi, have triggered a far-reaching legal and constitutional controversy in India's securities taxation regime. By directing companies registered in Delhi to pay stamp duty at the rate of 0.1% on the issuance of dematerialised shares, the Delhi Government has taken a position that departs sharply from the nationally standardised framework introduced through the Indian Stamp Act, 1899, as amended by the Finance Act, 2019. Under the Central framework, stamp duty on dematerialised share issuance is fixed at 0.005% and is collected through depositories such as NSDL and CDSL.
The divergence between the Central Government's mechanism and Delhi's directives has created serious uncertainty for companies, investors, and intermediaries. The issue is no longer limited to a difference in rates. It raises deeper questions relating to constitutional allocation of legislative powers, supremacy of Central law in procedural matters, retrospective tax liability, and the extent to which State Governments can deviate from a nationally harmonised securities taxation system.
This article critically examines the legality and constitutional validity of Delhi's stamp duty circulars, the statutory scheme under the Indian Stamp Act post-2019, and the practical compliance challenges faced by corporate India. The analysis is particularly relevant for start-ups, private companies, venture-funded entities, ESOP issuers, investors, and legal and compliance teams operating from Delhi and other commercial hubs.
- Background: Stamp Duty on Dematerialised Shares in India
The Indian Stamp Act, 1899 historically operated through a decentralised model. Stamp duty on securities was governed by State-specific schedules, rates varied across jurisdictions, and the situs of execution often determined taxability. This led to frequent disputes, revenue leakage, and complex compliance structures for companies operating across multiple States.
Recognising these inefficiencies, Parliament enacted sweeping reforms through the Finance Act, 2019. Sections 8A, 9A, and 9B were introduced into the Indian Stamp Act, 1899, creating a unified framework for levy and collection of stamp duty on securities transactions, including those executed electronically through stock exchanges and depositories.
Under the amended regime, stamp duty on the issuance of dematerialised shares is payable at the rate of 0.005% of the value of shares issued. The duty is collected at source by depositories such as NSDL and CDSL, acting as statutory collecting agents on behalf of the State Governments. The duty so collected is subsequently apportioned and transferred to the relevant State in accordance with the rules framed by the Central Government.
The Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 operationalised this mechanism with effect from 1 July 2020. Since then, the system has been uniformly implemented across India, and market participants have structured transactions in reliance on this framework.
- Legislative Intent Behind the 2019 Reforms
The Statement of Objects and Reasons accompanying the Finance Bill, 2019 makes the legislative intent unambiguous. The reforms sought to eliminate jurisdictional disputes between States, prevent multiple incidences of stamp duty on the same transaction, reduce compliance costs, and promote ease of doing business by creating a single-point, technology-enabled collection mechanism.
The reform was particularly significant for dematerialised securities, where the absence of physical instruments had earlier resulted in inconsistent treatment across States. The Central Government's intervention aimed to ensure certainty, predictability, and uniformity in securities taxation.
- The Legal Fiction Introduced by the 2019 Amendments
A central feature of the 2019 reform was the introduction of a legal fiction to address the intangible nature of dematerialised securities. Traditionally, stamp duty was levied only on "instruments", understood as physical documents evidencing rights or transactions. Dematerialised shares, which exist solely as electronic records, did not fit neatly into this paradigm.
To overcome this, the amendments deemed dematerialised issuances and transfers to be "instruments" for the limited purpose of stamp duty. Simultaneously, Section 8A(a) clarified that securities issued to depositories "need not be stamped". This dual construct allowed the levy of duty without reintroducing document-centric compliance burdens.
The legal fiction was carefully calibrated. It enabled taxation while avoiding duplication, disputes over situs, and the risk of multiple State claims over the same electronic transaction.
- Stamp Duty on Physical Shares Versus Dematerialised Shares
The distinction between physical and dematerialised shares remains critical to understanding the present controversy. Physical share certificates continue to be governed by State-specific stamp duty schedules. In Delhi, Article 19 of Schedule I-A of the Indian Stamp Act, as applicable to NCT of Delhi, prescribes stamp duty at the rate of 0.1% on instruments evidencing title to shares.
Dematerialised shares, however, are governed by a different statutory architecture. They operate within a Centralised depository system, rely on electronic records, and are subject to a uniform collection mechanism prescribed by the Central Government under the 2019 amendments.
The Delhi Government's circulars effectively collapse this distinction by subjecting dematerialised issuances to the same treatment as physical share certificates.
- Delhi Government Circulars: What Changed?
6.1 Circular Dated 29 July 2025: On 29 July 2025, the Department of Revenue, Government of NCT of Delhi issued a circular directing companies registered in Delhi to pay stamp duty at the rate of 0.1% on all share issuances, regardless of whether the shares were issued in physical or dematerialised form. Companies were advised to seek adjudication of stamp duty and remit payment through the State mechanism. This circular treated dematerialised share issuances as instruments chargeable under Article 19 of Schedule I-A, effectively disregarding the Centralised framework introduced in 2019.
6.2 Letter Dated 29 September 2025 to Depositories: The controversy escalated further when the Delhi Government addressed a letter to NSDL and CDSL asserting that stamp duty on share issuances by Delhi-registered companies falls exclusively within State jurisdiction. The letter directed depositories to cease collection of stamp duty at the rate of 0.005% and required companies to pay stamp duty directly through the SHCIL e-stamping portal.
These communications have disrupted the uniform national system and placed companies and depositories in a position of conflicting legal obligations.
- Core Legal Issues Arising from Delhi's Directives
Two fundamental legal questions arise from the Delhi Government's position. First, whether a State Government has constitutional authority to prescribe stamp duty rates on the issuance of dematerialised shares. Second, whether a State can override or bypass the collection mechanism prescribed by the Central Government under the Indian Stamp Act and the 2019 Rules.
These questions lie at the intersection of constitutional law, statutory interpretation, and securities regulation.
- Constitutional Competence: Allocation of Stamp Duty Powers
The Seventh Schedule to the Constitution of India divides legislative powers between Parliament and State Legislatures. Entry 91 of the Union List empowers Parliament to prescribe rates of stamp duty on instruments relating to the transfer of shares. Entry 63 of the State List authorises States to prescribe stamp duty on documents other than those specified in the Union List. Entry 44 of the Concurrent List governs stamp duty administration and procedure, but expressly excludes the power to prescribe rates.
On a plain reading, Parliament controls stamp duty rates on transfer of shares, while States control rates on issuance of shares, provided such issuance is evidenced by a "document" within Entry 63. The controversy therefore hinges on whether dematerialised share issuance results in a "document" for stamp duty purposes.
- Arguments Against State Power Over Demat Issuances
Those challenging Delhi's position argue that dematerialised shares do not involve a physical instrument, have no identifiable place of execution or delivery, and exist purely as electronic book entries within a depository system. This makes it conceptually difficult to localise the transaction for State-specific taxation.
Judicial guidance supports this difficulty. In Jry Investments Private Limited v. Deccan Leafine Services Ltd., the Bombay High Court observed that dematerialised shares are intangible and incapable of physical delivery, complicating attempts to attribute them to a specific territorial jurisdiction.
From this perspective, dematerialised share issuances fall outside Entry 63, and the State's authority to prescribe stamp duty rates is constrained.
- Counter-Argument: Electronic Records as "Documents"
The opposing view rests on statutory recognition of electronic records. Ownership of dematerialised shares is reflected in electronic records such as BENPOS statements maintained by depositories. The Information Technology Act, 2000 accords legal equivalence to electronic records, and the Income-tax Act, 1961 expressly includes electronic records within the definition of "document".
The Indian Stamp Act itself defines "instrument" to include any electronic record by which rights are created, transferred, or recorded. A BENPOS statement records beneficial ownership and evidences title to shares. Applying the principle that stamp duty depends on substance rather than form, such records can be treated as instruments evidencing title, attracting stamp duty under Article 19.
- Procedure for Collection: Can Delhi Deviate from Central Rules?
11.1 Statutory Position: Section 9A(1)(c) of the Indian Stamp Act mandates that stamp duty on dematerialised issuances shall be collected "in such manner as the Central Government may, by rules, provide". The Indian Stamp Rules, 2019 require depositories to collect duty prior to execution of transactions in the depository system.
11.2 Constitutional Implication: While both Parliament and State Legislatures may legislate on procedural aspects of stamp duty, Article 254 of the Constitution provides that Central law prevails in case of conflict. Any State directive that alters or bypasses the collection mechanism prescribed by the Central Government is therefore constitutionally vulnerable.
- Why Delhi's Directives Appear Ultra Vires
By directing companies to remit stamp duty through SHCIL instead of depositories, the Delhi Government has disregarded Section 9A of the Indian Stamp Act and the Rules framed by the Central Government. Depositories remain statutorily obligated to collect duty, and conflicting State instructions place them in an untenable legal position, exposing them to penalties for non-compliance.
This regulatory disconnect undermines the objective of single-point, non-duplicative stamp duty collection that formed the core rationale of the 2019 reforms.
- Practical Impact on Companies and Investors
The immediate impact of Delhi's directives has been severe compliance uncertainty. Start-ups, ESOP issuers, and venture-backed companies face ambiguity on whether reliance on depository-collected stamp duty suffices or whether additional payment at a significantly higher rate is required.
The threat of retrospective adjudication and penalties further aggravates the situation. Companies that complied in good faith with the Central framework now face potential demands for differential duty and penalties extending up to ten times the alleged deficiency. This erodes investor confidence, increases transaction costs, and introduces friction into capital formation.
- Centre-State Tension Awaiting Judicial Clarity
At its core, this controversy reflects a breakdown in coordination between the Central Government and State Governments. The Finance Act, 2019 introduced a unified, technology-enabled stamp duty regime that is administratively efficient and economically rational. At the same time, the constitutional authority of States to levy stamp duty on documents under Entry 63 remains intact.
Until judicial clarity emerges on whether dematerialised share issuance falls within State legislative competence, fragmented enforcement poses a real risk to India's securities market. Interim relief, policy alignment, and prospective application are essential to prevent compliant companies from being penalised for actions taken under a Central statutory framework.
- Conclusion
The dematerialised share stamp duty controversy is not an abstract constitutional debate. It is a live regulatory crisis affecting thousands of companies, millions of shareholders, and significant volumes of capital.
The Central Government's unified regime is administratively sound and market-friendly. The Delhi Government's assertion of authority under Entry 63 is legally arguable. However, legal correctness without operational harmony serves neither the State nor the market. Companies cannot comply with contradictory mandates, and investors cannot deploy capital amid regulatory uncertainty.
Resolution may require judicial intervention, legislative clarification, or structured Centre–State consultation. What is imperative is that until such resolution, bona fide compliance under the Central framework is protected and retrospective penalisation is avoided. India's securities market cannot be allowed to bear the cost of unresolved jurisdictional conflict.
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