India’s economy is growing and growing fast. In fact, it has the potential to become the world’s 3rd largest economy in the coming decade. Commodity trading has been one of the most significant contributors to the Indian economy and recent changes to the regulatory environment have been designed to give investors greater confidence. As investment in to the continent rises there are specific risks which traders need to be aware of. In particular stamp duty. We explain the nuances of stamp duty below.
Under English law, stamp duty is only applicable to the sale and purchase of land or realty. In India, when there is a conveyance or transfer of movable or immovable property, the document effecting the transfer is liable to stamp duty. If English law is expressly agreed as the governing law of the contract, stamp duty may still be payable and the consequences for non-payment can be costly.
In October 2010, the Supreme Court of India in State of Uttaranchal & Others v/s. M/s. Khurana Brothers, held that a sale of goods contract is a transfer of movable property and therefore a ‘conveyance’. As an instrument of conveyance, the sale contract is liable to be stamped.
This case involved the sale of crude resin and the Supreme Court of India decided that all of the conditions for the transfer of movable property in accordance with theStamp Act were satisfied.
In particular, the Supreme Court of India held that the essence of sale is the transfer of the property or the goods from one person to another for a price. A sale contract is therefore a document by which movable property is transferred and thus a conveyance.
Liability to pay stamp duty
Stamp duty is charged at both a central and state level. Stamp duty will be payable under the relevant state law or under the Indian Stamp Act 1899 which applies to the whole of India apart from those states which have enacted their own stamp law.
Liability to pay stamp duty can be triggered by the instrument being executed in India, or the document (and in some cases a copy or an extract) being brought into India. The stamp duty law applicable will be determinedby the location the document was deemed executed, or the place where the document was brought into the country.
The party liable to pay the stamp duty is usually the buyer, although the parties are free to agree who pays it and in what proportion.
Owing to the differing state and central laws, the rates of stamp duty and the penalty for failing to get a document duly stamped, vary.
In one of the cases we have encountered, our client was advised that the applicable stamp duty was approximately 3% of the contract value and the penalty for failure to stamp the document was an additional 2% per month of the contract value from the date of execution of the contract until the date of payment.
Penalty and consequences
Failure to pay stamp duty (even by an Indian buyer whose responsibility it is to pay any such duties), renders the sale contract itself inadmissible as evidence and therefore unenforceable in India until the stamp duty and applicable penalty is paid. Improperly stamped documents can also be impounded by any "public officer".
This includes arbitrators. If impounded, the document may then be referred to the relevant authorities for adjudication of the proper stamp duty and penalty. Only after the applicable stamp duty and penalty is paid may the document be admitted as evidence. In the event an arbitrator does not impound an unstamped document, any arbitral award given on the basis of the unstamped contract will face significant challenges in enforcement proceedings.
One consequence of this is that an Indian buyer whose responsibility it is to pay the Indian stamp duty may set up a defence to any claim by the seller by not complying with its own Indian law obligations. In essence, there is a danger that the Indian counterparty may profit from its own breach, owing to the (presumably unintended) consequences of this aspect of Indian legislation.