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Electronic Records in Share Market - Stamping it or Stumping it

Written by: Roopam Verma & Kanupriya Bhargava - Law Student
Constitutional Lawyers in India
Legal Service
  • Abstract of The Article
    The major concern of this article is to analyse the nuances of the recent action taken by the State of Maharashtra by imposing the stamp duty and its impact on the electronic commerce, although the amendment was not being adopted by state, but the article is concerning with the situation where the amendment if on being accepted would have carried serious inconsistency with the Stamp Act, Constitution of India and other related problems. The article also analyse possible solutions to cope up with conditions where the interest of state clashes with Central Legislation and lastly suggesting format which can be adopted for
    imposing duty on the electronic commerce.

    GAIL has signed an agreement with the NSDL for providing this facility to the shareholders of GAIL. For subscribing to this system, shareholders would first need to dematerialize their shares. This can be done through any of the Depository participants of NSDL. After this, shareholders can trade the shares without any physical deliveries of the share certificates and no stamp duty is payable at the time of transfer unlike in the case of physical transfer.

    This excerpt indicates GAIL offering facility to all of their shareholders after opening Depository account, they can trade the shares without paying any stamp duty. But the position would have had not been the same as the State of Maharashtra some time before by its amendment under Bombay Stamp Act, 1958 has made all electronic transaction subjected to the Stamp duty. By doing so, they have not only by disturbed its harmony with Indian Stamp Act, 1899 but also created a doubtful situation questioning about its consistency with the pillars of Constitutional of India. The major concern in this article is to analyse the nuances of action taken by the State of Maharashtra and its impact on the electronic commerce, what would have been possible solutions to cope up with this condition where the interest of state clashes with Central Legislation and lastly suggesting format which can be adopted for imposing duty on the electronic commerce.

    Face To Face With Amendment

    State of Maharashtra by introducing Bombay Stamp (Amendment) Ordinance, 2005 has levied stamp duty on electronic transaction through Stock Exchange. Article 51A of the same states: "Record of Transaction (Electronic or otherwise) effected by a Trading Member through a Stock Exchange or the Association Referred to in Section 10B." This amendment could not only have severe repercussion on the State's economy but also on the growth of electronic commerce throughout the nation.

    Further, the statement at the end of the ordinance provides: To cope up with the new form of trading after inception of the Depositories Act, 1996 and the Information Technology Act, 2000 and to facilitate stamp duty collection, a simplified category wise structure as delivery and non-delivery transactions is being introduced.?

    Inconsistency With Section 8a of Indian Stamp Act, 1899

    While making this amendment the framers as we can gather from the statement have really strained themselves to cope up with Depositories and I.T. Act, without even realizing that they are going against the spirit of Indian Stamp Act, 1899. As the language of Section 8A of the Indian Stamp Act provides:-
    Securities not liable to stamp duty- Where in an insurer issues a securities to one or more depositories, then such securities need not be stamped. Also, transfer if registered ownership of shares from the person to depositories or from depositories to a beneficial owner shall not be liable to any stamp duty. Hence, we can say that to the extent the transaction in government or other securities are conducted through depositories this provision of Indian Stamp Act exempt them from Stamp duty. Making such transaction liable under Stamp duty by adding word? electronic transaction? made it inconsistence with the Section 8A of the Indian Stamp Act. Where in Indian Stamp Act is undoubtedly a Central Law and have overriding effect over any state made law, if found not in consistency.
    Inconsistency With I.T. Act, 2000.

    However, another school of though advocates that it is discriminatory to exempt Stamp duty on all those transactions which occurs via electronically through depositories account. As procedure for paper- based documentation and electronic transaction is more or less same except for the point that former is more time taking and complicated and requires lots of paper work where as the later one is easy and time consuming and denies physical documentation on the part of the investor. But the moot question is can this difference be considered as sufficient to allow discrimination on the basis of payment of Stamp duty.

    The possible answer is not in visualizing the problem from same suggested portal but it need to adopt a purposive interpretation. As we have seen that with the advent of Information Technology Act, 2000 in our country a due recognition was being given to the electronic transaction and records as practice of commerce. As the title of the Act states and to further quote:
    " An Act to provide legal recognition for transactions carried out by means of electronic data interchange and other means of electronic communication, commonly referred to as electronic commerce, which involve the use of alternatives to paper based methods of communication and storage of information, to facilitate electronic filing of documents with the Government agencies and further to amend the Indian Penal Code, the Indian Evidence Act, 1872, the Bankers Books Evidence Act, 1891 and the Reserve Bank of India Act, 1934 " Intention of the Act was amply clear that it has been enacted to facilitate the commercial transactions and impact transaction. Above mentioned Acts have been amended accordingly to give due recognition electronic transaction and to take I.T. Act in consonance with them.

    This Act basically ruled out the age old concept of paper based documentation process by providing new data messaging services (undoubtedly has got the legal recognition). Data messaging service is a better and feasible option in hand at present; on using it you get a better replacement on the concepts like that of writing, signature and language etc. These electronic data can be produced for n- number of times with no question as to its originality. Also, by this electronic revolution it became easy for the investor from any part of the country to keep his shares and securities with him in liquidated form . But in developing countries like India information technology is still at the nascent stage, especially in relation to the electronic transaction. Imposing Stamp duty on such initiatives would in turn hamper the usage of the e-commerce. If the decision has been allowed to carry out, then investors will get impacted since brokers will pass on stamp duty charges to them, which will result into discouragement of all initiatives taken in order to promote the system of electronic commerce.

    Other Related Problems
    Success of Western Stock Exchange in trading electronically with Stock and Commodity inspired India to introduce replica of the Western Electronic Transaction system in India. I.T. Act provides electronic trading platform form to get access to trade electronically to any place throughout the country. If State of Maharashtra levy Stamp duty on electronic transaction taking place in the state via BSE or NSE where as at the same time such Stamp duty in exact form (i.e. not in the form of capital gain tax) has not been charged by other State then it will lead to paradoxical situation. This meant that the stamp duty applicable in Maharashtra had to be paid over and above the duty payable in other states in case of trade outside the state, but routed through the BSE or the NSE.

    Inconsistency With Article 286 of Constitution of India

    The impugned amendment also goes in violation of Constitution of India as Article 286 provides:- Restrictions as to imposition of tax on the sale or purchase of goods. -
    (1) No law of a State shall impose, or authorize the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place-
    (a) Outside the State; or
    (b) In the course of the import of the goods into, or export of the goods out of, the territory of India.

    Where as if the State of Maharashtra imposes the Stamp duty on all electronic transaction which have been occurring either via Maharashtra to other states or via other states to Maharashtra. These situations will result into imposition of duty contrary to the Constitutional Law as they have to no authority to command transaction outside the State and hence giving them extra- territorial operation. The act of State can not take any stand because the essence of electronic commerce is to abolish the boundaries between States and Countries. Where as this amendment will work as an inspirational source for other States to enact same kind of amendment. Simple reason for it would be right to earn revenue with just actions, hence on validating this amendment the possibility in future for States to come up with same kind of amendment cannot be ruled out. In such a situation different States will come up with different figure to satisfy there economic needs.

    Relying on above discussion we would like to conclude by saying that firstly, for any nation state's economic growth technology factor cannot be overlooked completely as both should go hand in hand, even though one area has to sacrifice a bit. Since involvement of technology with law is not broaden much in developing countries like India as still we are trying to put it in a frame. If one or the other State will continue to making laws discharging their own interest then it will result into blockage for progress. If we want electronic commerce to flourish in country, then it should be liberated from the clutches of restrictions like Stamp duty etc. resulting obstacle in its growth. It should be treated like an newborn child who needs support to walk, we should nourish this concept so that we can reap benefit out of it at later stage.

    However, at the same time there are various other compelling reasons for the State to impose Stamp duty on transactions independent of the fact whether it is an electronic one or not, like in this case the government has justified the move on the ground that proprietary trades are routed through members or between members of stock exchange and that records are generated and should be subjected to Stamp duty. Possible solution to this can be given in two folds:
    Firstly at its verge stamp duty on such transaction should be ignored.

    Secondly, if not feasible for the states economy then with the help of Center's initiative States should brought methods which not only provides for successful e-commerce tax but also provides system for maintaining neutrality, fairness and simplicity, and to encourage all desirable economies activity, new and old. Rules that provide certainty and prevent double-taxation should be made. All these criteria are seemingly satisfied if the State tries to opt for transactional tax which should be based on payment of duty on the basis of transaction and should have characteristic of applicability all over the country. It will in turn bring a better revenue collection and that to on uniform rate, where evasion would almost be impossible. Unlike the system where Stamp duty is a voluntary service as you cannot detect the evader in case if he tries to evade it.

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