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A new government has taken charge in Mumbai. This would be the third term of the central government where the political party in power at both, India's political capital as well as the financial capital would be the same.
Having both the governments in the hands of the same political party has not had much value in the past ten years, particularly when it came to unfair transaction costs being inflicted on the entire Indian economy. Take stamp duty. It is a duty payable on specific "instruments" i.e. on specified documents executed in any state, documenting anything to be done in that state.
Payment of stamp duty enables the document to be admissible in evidence when brought for enforcement (the convention among Mumbai lawyers is that they would not raise non-payment as stamp duty as a ground for vitiating enforcement - somewhat like a bowler not running the non-striker out in cricket if he has strayed off the crease even before the ball can be delivered - but that is a digression). Various instruments are listed in the schedule to the Bombay Stamp Act as instruments that are subject to payment of stamp duty. If an instrument that is chargeable to stamp duty were to be executed outside Maharashtra, it would have to be stamped upon entering Maharashtra. In 2005, right after the central government piloted a securities transaction tax through Parliament - a tax that can only be imposed by Parliament - the Maharashtra government got the State legislature to use the Bombay Stamp Act to impose a securities transaction tax masquerading as stamp duty.
One of the instruments on which stamp duty is payable is the "contract note" that stock exchange bye-laws and Sebi Regulations require brokers to issue to clients. This is an important instrument since this is the document that evidences that the broker has executed a transaction, and that the investor had instructed him to do so. However, even if a broker were executing his own transaction, with his own money, and does not have to issue a contract note to himself, the new law required stamp duty to be paid, even in the absence of an instrument.
Through this change, members of the two nationwide stock exchanges who have no presence at all in Maharashtra still had to pay stamp duty to the Maharashtra Government for undertaking proprietary transactions. Merely because these exchanges are headquartered in Mumbai and their trading servers are in Maharashtra, the state of Maharashtra got to impose a tax through stamp duty laws on the entire Indian secondary capital market. The central government, despite being led by the same political party did nothing to stop it. Other state governments wanted to follow suit, and stock brokers, ever reluctant to fight the system after their brutal defeat in the challenge to the capital market regulator's turnover-linked registration fees imposed in the 1990s, let the law go unchallenged. The Bombay Stamp Act also imposes stamp duty on the "Clearance List" of trades cleared in Maharashtra.
Transactions in government securities and corporate securities, cotton, bullion, oil seeds, yarn, and debts are charged to stamp duty, if they are cleared in Maharashtra and the list is generated in the state. As the financial capital, with the markets being headquartered in Mumbai, this is naturally a transaction cost imposed by Maharashtra on the rest of India. No known empirical study exists to show that the imposition of this transaction cost leads to any material benefits to the state outweighing the transaction costs being imposed on all of India. More importantly, whether removing these anachronisms would spur a greater volume of trade and transactions, and have other multiplier benefits for Maharashtra, is something that needs to be thought about.
There is yet another aspect of stamp duty imposing transaction costs. Mumbai is also the service capital of the country. Ad agencies, media planning houses, merchant bankers and the like thrive here. Any agreement in which the pecuniary value of obligations can be computed, also has to be stamped in proportion to such value of the obligations, without any ceiling. Businesses go through hoops to ensure that their documents do not enter Maharashtra even if they relate to anything being done in the state - a sad story for enforcement mechanics.
To deter this practice, the stamp duty law in Maharashtra treats even a substantial extract of an agreement brought into Maharashtra as an entry of a "counterpart" of an agreement. All of this is entirely avoidable activity, taking the focus of business and industry away from what they are supposed to be good at.
The Prime Minister's "minimum government and maximum governance" is a slogan, alright, but for it to be actually implemented these are the types of areas that would need serious work and intervention.
The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own
