Uniform stamp duty for financial instruments may push M&A cost: Experts

Such a move could drag states' ability to woo investors , say experts

A process to streamline stamp duty collection for financial instruments, as proposed in the interim Budget, may have multiple effects. It is likely to affect states, brokers, companies closing deals and those looking to raise debt capital.

The cost of raising debt through debentures, and carrying out mergers and acquisition deals may be higher than before. Brokers are likely to see operational efficiency but more friction in terms of costs. States’ ability to attract stock market activity may also come under question, say experts. 

The move comes even as the stock market bellwether has been touching record highs over the last few years. More and more investors have been participating in the equity boom.

As it stands, both states and the Centre have the power to levy a stamp duty and decide its rate. Its collection was in the hands of state governments. The central government could decide on the stamp duty for bills of exchange, cheques, letters of credit, policies of insurance, bills of lading and promissory notes. It could also decide on the duty for transfer of shares, debentures as well as proxies and receipts. 

Meanwhile, states decide on the rates for all other instruments, according to L Badri Narayanan, partner at law firm Lakshmikumaran & Sridharan. State governments widened the ambit of this definition by including the record of market transactions under other instruments, according to a pre-Budget representation by stockbrokers requesting abolishment of stamp duty. This allowed them to raise tax revenues from the stock market. Some also used it to attract stock market activity through lower rates. 

Since the rates vary from state to state, parties used to route the transaction through the states prescribing a lower rate, according to L Badri Narayanan.

Now the collection will be centralised. The rate, too, is uniform. 

“Stamp duties will be levied on one instrument relating to one transaction and get collected only at one place, through the stock exchange. The duty so collected will be shared with all state governments, seamlessly, on the basis of domicile of the buying client,” acting Finance Minister Piyush Goyal had said in his Budget speech on Friday.  This brings about a fundamental shift in state-Centre equations when it comes to stamp duty. 

“The move for a centralised stamp duty rate on share transactions could also hit states’ ability to impose lower stamp duty... to attract stock market activity. Uniform stamp duty rate may neutralise the disparity between states and will cease to be a consideration while deciding on the state in which brokerage firms choose to set up their shop,” said Bhavin Shah, financial services tax leader at PwC India.

The states may have to make their amendments before the shift if effected, though this is not expected to be an impediment. 

“The corresponding amendment will have to be made by the states which have not adopted the Indian Stamp Act i.e. enacted their standalone stamp duty legislation. Therefore, states also need to amend their respective state legislation to bring in uniformity. However, assuming the Centre has already consulted states, there should not be much of a difficulty,” said Narayanan.

Brokers have already expressed unhappiness over the move. They said that abolishment would be better, terming the duty is a second form of securities transaction tax (STT), in addition to the STT already collected by the Centre. 

Meanwhile, there are also implications for companies. Currently, companies which raise debt capital through instruments face a maximum stamp duty of Rs 25 lakh. The new regime removes this cap, potentially leaving room for higher payouts to the government. This could potentially make it more expensive to raise large debt capital through this route as well, according to Shah.

The new norms could also have an impact on merger and acquisition transactions. “From a (mergers and acquisitions) perspective, all deals going forward will become costlier due to the stamp duty, irrespective of the securities being listed or unlisted or for that matter whether in dematerialised or physical form,” said Amrish Shah, Partner, Deloitte India

The year 2018 was the biggest year for mergers and acquisitions in India, according to market-tracker Thomson Reuters Deals Intelligence. The $16 billion purchase of a 77 per cent stake in e-commerce major Flipkart by American retailer Walmart helped propel total deal value for the year to over $125 billion, according to the data.