Stamp duty implications on demerger by Vanshika Chauhan at LEXCLIQ

Stamp Duty Implications on Demerger

The levy of the stamp duty is emanated from the Constitution of India 1950, and the Indian Stamp Act, 1899 (‘Stamp Act’) being a fiscal statute lays down the law relating to duty levied in the form of stamps on instruments recording transactions. The levy and collection of the stamp duty on M&A is subject matter of the States in India by virtue of the legislative entry 63 in the State List and Entry 44 in the concurrent list in the 7th Schedule of the Constitution.

The stamp duty implications pursuant to the scheme of amalgamation sanctioned by the Hon’ble High Courts in India in terms of the provisions contained in Indian Stamp Act, 1899 (to the extent adopted by National Capital Territory of Delhi with relevant modifications). The list of instruments chargeable with stamp duty along with the applicable rates has been mentioned in Schedule I of the Stamp Act. The term conveyance, being one of the instrument on which stamp duty is levied, has been modified by various states. As a matter of abundant caution, several states such as Rajasthan, Maharashtra, Gujarat, recently Haryana, etc. have specifically included a court order approving a scheme of amalgamation under the definition of “conveyance” under the relevant schedules/acts providing stamp duty rates. However, states which do not have such an explicit inclusion continue to face the dilemma. In this regard, Delhi has adopted the Stamp Act with certain modifications and is among those states which have not expressly included the order of High Court approving the scheme of amalgamation under the definition of conveyance. Meaning of Conveyance The term of conveyance has been defined in section 2(10) of the Stamp Act as produced below:

“Conveyance includes a conveyance on sale and every instrument by which property, whether movable or immovable, is transferred inter vivo and which is not otherwise specifically provided for by Schedule I.” Rate of Stamp Duty* In terms of stamp duty, though the state laws provide for rates of stamp duty to be paid on various instruments, it is observed that generally there is no specific entry for a High Court order sanctioning the scheme of amalgamation or demerger, in the absence of which High Courts have taken the view that the High Court order involving the transfer between two juristic persons of certain movable and immovable property, is a ‘conveyance’ and should therefore be chargeable to stamp duty under that head, and the scheme of arrangement itself is an ‘instrument’ under which the going concern is transferred. This position has been consolidated by the Supreme Court in Hindustan Lever and Anr. v. State of Maharashtra and Anr. The Bombay High Court has held that a scheme of arrangement entails transfer of a going concern, and not of assets and liabilities separately. As a going concern, the value of the property transferred under a scheme of arrangement is reflected from the shares allotted to the shareholders of the transferor company under the scheme. Accordingly, under the Bombay Stamp Act, 1958 (applicable in the state of Maharashtra), stamp duty payable on conveyance relating to amalgamation of companies is 10% of the aggregate of the market value of the shares issued or allotted in exchange or otherwise and the amount for consideration paid for such demerger, provided that it shall not exceed (i) 5% of the total true market value of the immovable property located within the state of Maharashtra* and as transferred by the transferor company to the resulting company; or (ii) 0.7% of the aggregate of the market value of the shares issued or allotted and the amount of consideration paid for the demerger, whichever is higher.

 

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