Uniform stamp duty on stocks rationalises charges, but will it really impact share market investors?

In the current scenario, stamp duty was payable by both seller and buyer whereas in the new system it is levied only on one side

The government on Tuesday announced to implement uniform stamp duty on transfer of shares, debenture and investment in other financial instruments such as mutual funds, new fund offers of MF schemes including systematic investment plans (SIPs) and systematic transfer plans (STPs) from today, July 1, 2020. These changes will help to facilitate ease of doing business and bring in the uniformity of the stamp duty on securities across states. “From investors’ point of view, the current changes are neutral as those paying lower than current charges get to pay marginally higher while those paying higher than new rates get to pay lower. So net net it’s neutral,” Narendra Solanki, Head Fundamental Research, Anand Rathi Shares and Stock Brokers, told Financial Express Online.

The changes were to be implemented from January 9, 2020, but were later extended to April 1 and then on the back of country-wide lockdown situation due to Covid-19, these were postponed to July 1. “Uniform stamp duty will have a very marginal impact on the overall transaction cost for the customers especially if they are long term investors as compared to short term investors. This will provide another reason to invest in equities for a long-term horizon,” Rajeev Srivastava, Chief Business Officer at Reliance Securities, told Financial Express Online.

Earlier, different states had different stamp duty rates, which means two broker companies in two different states were charging differently. “Now everything is made the same and there are no state-specific differences in the new structure. So, it’s more of a rationalisation,” Solanki added. This rationalized system through a centralized collection mechanism is expected to ensure minimisation of cost of collection and enhance revenue productivity.

The present system of collection of stamp duty on securities market transactions led to multiple rates for the same instrument, resulting in jurisdictional disputes and multiple incidences of duty, thereby raising the transaction costs in the securities market and hurting capital formation, according to the finance ministry statement. “Uniform stamp duty rates and its centralised collection is a welcome move by the government as it will not only reduce the hassle at the brokers’ end but will also provide a level playing field to all customers across the states,” Rajeev Srivastava added.

In the current scenario, stamp duty was payable by both seller and buyer whereas in the new system it is levied only on one side (payable either by the buyer or by the seller but not by both, except in case of a certain instrument of exchange where the stamp duty shall be borne by both parties in equal proportion). 

Besides shares, from today onwards, the rate of stamp duty has been changed for debentures, transfer of demat securities, futures, options and government securities, among others. Also, transfer of shares at the time of inheritance and gifts which make up for off-market transactions will also be charged now. “Further, this system will help develop equity markets and equity culture across the length and breadth of the country, ushering in balanced regional development,” the finance ministry statement added.