Maharashtra Ordinance takes on India

WITHOUT CONTEMPT

A month ago, this column spoke about the perils in the capital market due to the Maharashtra government's approach to Stamp Duty legislation. (Stamping out Mumbai's Capital Market in edition dated April 11, 2005).

In keeping with expectations, a few days ago, the IT-savvy governor of Maharashtra promulgated the Bombay Stamp (Amendment) Ordinance, 2005 amending the Bombay Stamp Act, 1958 to provide for stamp duty on electronic records of securities transactions.

Couched in the garb of stamp duty, the Ordinance imposes a transaction tax on securities transactions in violation of the Constitution of India.

The Ordinance also results in extra-territorial taxation of transactions. Securities transactions that have no connection with Maharashtra can now face the incidence of stamp duty.

The Ordinance blatantly attempts to undo the benefits conferred on the securities market by Parliament. The stated object of the Ordinance is to "to cope with the new form of trading after inception of the Depositories Act, 1996 (Act No.22 of 1996) and the Information Technology Act, 2000 (Act No. 2) of 2000)".

With the Depositories Act, Parliament had ensured that transactions in dematerialised shares would be free of stamp duty. The Maharashtra government wishes to re-impose this duty through the back-door.

Since stamp duty is not a transaction tax but a duty payable on the creation and execution of specified instruments, the Ordinance has inserted a new Article 51A that imposes an ad valorem stamp duty payable on every recording of a transaction of a securities or commodity broker, whether in electronic or physical form.

Under the Constitution, taxation of securities transactions is clearly out of the ambit of state legislature and rests squarely within the powers of Parliament, which is why the Depositories Act did away with stamp duty on trading in dematerialised securities. Even the rate of stamp duty on transfer deeds for trading in physical shares may be prescribed only by the central government.

Here is why Article 51A is a transaction tax:

An electronic record of every transaction would be contained in the computer systems of the buying broker, the selling broker, their respective clients, and of course, also in the server of the stock exchange.

Each of these electronic records is an instrument within the charge of Article 51A unless Maharashtra amends the law to clarify which of these instruments recording the same transaction would be amenable to stamp duty. This, in turn, would further underline the fact that Article 51A only intends to tax the underlying transaction instead of an identifiable instrument.

Another important trait of this back-door transaction tax is that the Ordinance imposes a lighter ad valorem duty on speculative day traders who contribute to trading volumes as compared with the duty on transactions that result in delivery identical to the duty structure imposed by Parliament for the securities transaction tax.

If Article 51A is not a transaction tax, any state legislature can impose stamp duty on books of accounts of every person (these will clearly be 'instruments') and charge ad valorem stamp duty as a percentage of the profits recorded in the books.

If Article 51A is not a securities transaction tax, such a duty on books of accounts will not be income-tax (on which only Parliament can legislate).

Worse, the Ordinance has extra-territorial implications. If the record of every transaction stored in the servers of stock exchanges headquartered in Maharashtra is an instrument amenable to stamp duty, transactions by brokers who have no presence whatsoever in Maharashtra would also face the incidence of stamp duty.

On the other hand, if records of transactions of outstation brokers are exempted from stamp duty despite the instruments residing in the servers located in Maharashtra, it would further underline the fact that Article 51A is but a transaction tax.

Apart from being unconstitutional, the imposition of yet another transaction tax on securities transactions will lead to volumes drying up. Not many are yet aware of the full implications of the Ordinance. This is a piece of law that cries out for a federal review.

(The author is a partner of JSA, Advocates & Solicitors. Views expressed here are his.)

somasekhar@jsalaw.com