Picture this: You’re working as an in-house counsel in a startup.
You are on the brink of sealing your first major deal, champagne ready to pop, when suddenly, you are told that the adequate stamp duty has not been paid on the transaction.
Not only does your deal fall through, but your company also ends up paying penalties.
Heartbreaking?
Yes, it can be if you do not know what Stamp Duty is and how it can change your life as an in-house counsel.
So, let’s first understand what Stamp Duty is.
Stamp duty is a tax charged by the government on certain documents to make them official and admissible in court. It is paid when these documents are signed or recorded and helps ensure that they are legally valid.
From share purchase agreements to merger deals, stamp duty plays a pivotal role in ensuring the legality and enforceability of critical documents.
As an in-house counsel, you’re the architect of seamless contract journeys—from drafting to executions. Contracts are not complete and legally valid until they are duly stamped. Therefore, Stamp Duty is a critical aspect of any commercial contract that every in-house counsel must be skilled in managing.
Today, I will tell you about the 10 important things that you need to know about stamp duty that you must know to save your company from penalties and skyrocket your position as an in-house counsel.:
- Which documents need to be stamped: Almost all legal documents, including commercial agreements, deeds, contracts, and conveyances, require stamping to be legally valid. The Indian Stamp Act provides an exhaustive list of such documents, leaving no room for ambiguity. Even agreements that do not find a specific mention in the Schedule are stamped under the miscellaneous entry.
You can see in the extract of the Maharashtra Stamp Act the entry in the schedule that provides for duty on any agreement creating obligations and having monetary value, that does not fall under any category.
- Stamp Duty Laws: Stamp duty regulations vary from state to state, and each state has its own Stamp Act. For example, while the Stamp Act of Maharashtra may specify a certain rate for a particular type of document, you’ll find that the rates could differ in Karnataka or Delhi. It’s essential to familiarise yourself with the specific regulations and rates in your state when dealing with stamp duty matters and to check the latest amendments and any notifications or circulars relating to stamp duty issues by the state governments.
However, in transactions of share transfer or share issuance, the stamp duty is uniform throughout the country, thanks to the 2019 amendment in the Indian Stamp Rules. The following are the rates for the transfer or issuance of shares as per the change:
- Modes of Payment of Stamp Duty: Stamp duty can be paid through various modes, including physical stamp papers, franking, and e-stamping.
- Physical stamp papers need to be procured from a registered stamp vendor. These are of fixed values normally 100 or 500. The minimum value of stamp paper is different in different states
- Franking involves imprinting a stamp on the document indicating that the requisite stamp duty has been paid. This can be done at franking centres which are usually banks or other registered franking services.
- E-stamping is the process of paying the stamp duty online and affixing the payment receipt with the document.
- Stamping of Electronic Documents: Now-a-days, business transactions and business contracts are mostly executed electronically to save time and expenses. However, this also raises concerns about the enforceability of e-agreements in courts and the stamp duty implications on such agreements.
So does an e-document need to be stamped? Yes absolutely, the term “document” includes any electronic document as well. While executing an electronic document it can be stamped with the help of e-stamping as described above after it has been digitally signed by both parties.
- Calculating Stamp Duty: Stamp duty calculation is based on various factors such as the type of document, its value, and the state where it’s being executed. Different states have distinct methods for determining stamp duty rates. The following information is needed to calculate the adequate stamp duty:
- Value of contract;
- State of execution/State in which property is situated; and
- Type of contract
All you need to do is check the Schedule of the relevant state act and look for the entry that describes your document.
For example, A works contract valued at ₹9,00,000 in Maharashtra, entry no. 63 below clearly mentions that a stamp duty of Rs 500 is needed to be paid.
- Payment Timing: Stamp duty is typically payable at the time of executing the document or within a specified period thereafter. Failure to pay stamp duty within the stipulated time can attract penalties.
For example, in Maharashtra, The stamp duty is required to be paid before signing, at the time of signing, or by the next working day after the signing of the document, if there is a delay in payment of stamp duty, a penalty at the rate of 2% per month is charged.
- Consequence of non-stamping or inadequate stamping: A document that is not duly stamped may be considered invalid in a court of law. It can be impounded by the court and sent for calculation and collection of appropriate stamp duty to the collector of stamps. In such a situation all proceedings are brought to a halt until the collector has recovered the stamp duty along with the penalty. This can lead to a considerable amount of waste of time and money.
- Stamping vs. Registration: Many times people confuse the process of stamping and registration. These are two distinct processes, stamping validates the document’s legal efficacy, and registration provides public notice of its existence and contents.
In Fact many lawyers make the mistake of assuming that just because an agreement does not need to be registered as per the Registration Act, 1908 it also does not need to be stamped. But this is absolutely wrong! All commercial agreements need to be stamped as per the relevant state stamp act.
- You can get a refund of Stamp Duty: Refunds for stamp duty can be requested in various situations, ensuring fairness and flexibility in transactions.
- If stamp paper gets damaged before signing or remains unused, refunds can be requested;
- Similarly, refunds are possible if a document is found to be illegal;
- Essential signatories pass away or refuse to sign;
- Parties are unable to complete transactions for any reason; and
- If the stamp paper gets spoiled
Each state prescribes time limits within which such refund can be sought.
- Stamp Papers do not expire: Stamp papers do not have an expiry period. The requirement to use them within six months applies solely to seeking a refund of their value, not to their use in documentation. Therefore, there’s no barrier to using stamp paper purchased more than six months prior for documentation purposes.