Corporate rejigs likely to attract stamp duty in TN
The Hindu Business Line
Associate Director — Tax and Regulatory Services
Ernst & Young
Senior tax professional
Ernst & Young
The applicability of stamp duty on the order of the High Court sanctioning a scheme of reconstruction or amalgamation under Sections 391 to 394 of the Companies Act, 1956 has been a vexed issue, with different States adopting differing stances. The Supreme Court in the case of Hindustan Lever has held that a scheme is an instrument subject to stamp duty. Certain States such as Maharashtra, Rajasthan, Andhra Pradesh and Karnataka have express statutory provisions making it liable to stamp duty.
In the absence of a specific provision, it was hitherto contended that a scheme of amalgamation is not an instrument and, hence, not liable to stamp duty in Tamil Nadu. However, to bring such schemes within the purview of stamp duty payment, the definition of the term ‘conveyance' is proposed to be expanded by the Bill amending the Indian Stamp Act (so far it applies to Tamil Nadu ). According to the proposed amendment the term ‘conveyance' shall include every order of the High Court under section 394 of the Companies Act, 1956 involving inter vivos transfer of property, whether movable or immovable, or any interest in any property. The proposed rate of stamp duty is as follows:
2 per cent of the market value of the immovable property of the transferor company, located within Tamil Nadu, which is the subject matter of the conveyance; or 0.6 per cent of the aggregate of the market value of the shares or other marketable securities which is the subject matter of the conveyance, issued or allotted in exchange or otherwise, and the amount of consideration paid for such amalgamation, whichever is higher.
The proposed amendment also poses certain interesting issues, a few of which are highlighted here:
Effective date — While the proposed amendment shall come into force on such date as the State Government may notify, if it is effected retrospectively, one has to see the impact of the amendment if the scheme was sanctioned before the date of notification or if the appointed date of the scheme is prior to the date on which the amendment comes into effect.
Valuation — It will be vital for the Government to clarify the methodology for determination of the market value of the immovable property or the shares. This valuation of unlisted shares becomes tricky, especially if the companies are in the process of getting private equity funding or considering an IPO.
Adopting the valuation for raising equity, which is generally based on future cash-flows, could pose serious hardship to the companies. Further the valuation of shares for stamp duty should be reconciled with other valuation methodologies such as those prescribed under the Income-tax Act, FEMA and so on.
Where an immovable property is transferred through a court scheme, the interpretation of what would constitute an immovable property, in the light of the Supreme Court decision in case of Duncans, could by itself create uncertainty over a transaction.
Exclusions — The amendment seeks to cover only schemes under Section 394. Arguably, there should be no stamp duty in the case of schemes under the other provisions of Companies Act, 1956 (for example, section 100). Similarly, where a subsidiary having no immovable property is merged/ demerged into its holding company, it should arguably be outside the purview of the stamp duty net, as no shares will be allotted by the transferee company.
While the proposed amendment is a welcome step in settling the ambiguity surrounding applicability of stamp duty, one will need to wait and watch on the mode of its implementation. The amendment is likely to have a significant impact on restructuring exercises undertaken by companies.