Stamp duty laws for M&A – an overhaul required

Falguni Shah and Jayesh SanghviM&A in corporate India has played a major role in giving a boost to the economy. To achieve various commercial objectives, the companies undertake corporate restructuring and consolidation in the form of merger, demerger, slump sale, asset sale, share purchase, etc. In such a scenario, along with the tax and regulatory aspects, stamp duty implications merit equal importance Stamp duty is a tax levied on an ‘instrument’ that transfers, limits, extends, extinguishes, or records any right or liability. Hence, the stamp duty is leviable on a transaction only if there is an instrument through which such a transaction is executed. Stamp duty is a levy imposed by both the centre and state. The centre has express rights to tax certain instruments viz. instrument for transfer of shares, bills of exchange, etc.; with the objective of uniformity in rates across India. The power to prescribe rates of stamp duty on other instruments, and reduce or remit duty on such instruments rests with the state governments.  Each state has different rates of stamp duty for conveyance of movable and immovable properties. In a few states, there is a surcharge on stamp duty and also a separate percentage-based registration fees. For M&A and corporate restructuring especially involving Schemes of Arrangement (‘Scheme’) approved by the Court under provisions of the Companies Act, there are diverse provisions of stamp duty across different states. For the longest time, the most disconcerting question was whether the court order approving a scheme is an instrument that needs to be stamped. The issue was put to rest by the Supreme Court in the case of Hindustan Lever¹  and allied judgements, which categorically expounded that the order of the High Court was an ‘instrument’ and therefore liable to stamp duty. Thereafter, many states have amended their legislation to include the entry of stamp duty (under the article of ‘conveyance’) on a Scheme. There was perplexity on whether duty is payable or not in a particular state not having specific entry for stamp duty on a Scheme. In the case of Delhi Towers Ltd, the Court held that though there is no specific entry for the Scheme, the court order approving the Scheme is a subject matter of adjudication under the entry of conveyance and hence transfer of property is liable to stamp duty in Delhi. Notwithstanding the contradictory rulings, authorities have been following the practice of charging stamp duty under the conveyance article in absence of specific entry for Schemes. Recently, Goa and West Bengal²  have introduced levy of stamp duty on court orders evidencing transfer of property. There is a vast difference in the rate of stamp duty on court order, distinguishing class of assets covered in the stamp duty net and variation in concession available. In Gujarat, the stamp duty on a court order approving a Scheme is 1% of value of immovable properties or 1% on higher of market value (for listed company) or face value (for unlisted company) of shares issued pursuant to the Scheme, whichever is higher. In Maharashtra, the stamp duty is 5% on value of immovable properties or 0.7% on value of shares issued pursuant to the Scheme, whichever is higher, subject to a maximum of 10% on the value of shares issued. In Goa, stamp duty is payable on both movable and immovable properties on the basis of rate applicable to conveyance being 7% (plus surcharge of 1%) on immovable properties and 6% on movable properties. However, if the paid up share capital of the transferee company is less than Rs. 5 crores and the directors of the entities involved in the scheme are common, then there is a remission of 80%. Karnataka levies 2% stamp duty on market value of all properties or 1% on value of shares issued and cancelled pursuant to the Scheme, whichever is higher.To alleviate some of the burden of stamp duty cost from the companies on account of the corporate restructuring, few states viz. Maharashtra, Gujarat and Rajasthan have presently provided a ceiling of Rs. 25 crores while in other states viz. Karnataka and Rajasthan, stamp duty is also payable on cancellation of shares in case of inter-company holding.Notification No. 1 of 1937 was issued to provide relief from stamp duty for companies undertaking internal restructuring (corporate arrangements between subsidiary and holding company where the holding company holds 90% or more in the subsidiary); however certain states such as Delhi expressly withdrew the notification while some other states are not providing this exemption. Recently, confusion has arisen on whether a set off of stamp duty payable in one state can be claimed in the other state in case two states are involved in a Scheme due to orders of two courts or the situs of properties in a state different from the state in which the court order is passed. The recent judicial ruling of the Bombay High Court in the case of Reliance Industries Limited and Reliance Petroleum Limited³ has highlighted this confusion. Hon’ble High Court, on its interpretation of the provisions of the Bombay Stamp Act, denied the benefit of rebate of stamp duty already paid on Gujarat order against the stamp duty to be paid in Mumbai. The High Court concluded that the orders passed by different courts are separate instruments that need to be stamped separately. This would result in double whammy for companies since the orders essentially provide the same transaction involving transfer of the same assets and liabilities through separate applications filed in different courts in different states. In case of conversion of a partnership firm into a company, the view prevailing is that there should not be any stamp duty in view of the decision of Hon’ble Andhra Pradesh High Court⁴. The reason is that there shall be statutory vesting of title of all the property of the firm into the company on change of the constitution of the partnership firm into a company under Part IX of the Companies Act without any need for a separate conveyance. Contradicting such a view, recently, Rajasthan has amended its Stamp Act to include a duty of 2% on the market value of immovable property vested in an LLP on conversion of a private / public unlisted company into an LLP.Stamp duty results in an immediate outflow of funds in any M&A activity, whereas the benefits are derived gradually. All the above factors have made corporate restructuring and consolidation an expensive affair for companies. For example, prior to doing an Initial Public Offer, consolidation of various operating entities / businesses within the group would be necessary. Similarly, in case of fund raising for a particular segment in a company, segregation of business would be necessary. Such transactions can be consummated by way of a Scheme. Under the Income Tax Act and other Indirect Taxes Laws, there are exemptions to such kinds of restructuring to make them a tax neutral exercise. However, the factors discussed above have cumulatively posed serious issues for such activities. For giving a boost to M&A activities, the rate of the stamp duty should be reduced manifestly to make them commercially feasible for all the stakeholders. What needs to be evaluated is the whether the benefits outweigh the cumbersome nature of compliances to be followed in order for companies to achieve synergies.Views expressed are personal. Falguni Shah is Partner- M&A Tax at Pwc India and Jayesh Sanghvi is Director- M&A Tax at PwC India. Article includes contributions from Lakshmi Chaturvedi, Assistant Manager, PwC India.  1 Hindustan Lever & Anr. vs. State of Maharashtra (2004) 9 SCC 438 (SC)2  Haryana has proposed through an internal memo levy on transfer of property3  Civil reference No. 1 of 2007 4  Valli Pattabhirama Rao and Anr v Sri Ramanuja Gin. & Rice Factory P Ltd & others