Invest in India: All You Need to Know About Stamp Duty

Invest in India: All You Need to Know About Stamp Duty

INTRODUCTION

Contracts play a vital role in establishing business relations between the foreign investor and domestic entity. They also serve as a backbone for all business transactions and maintaining commercial relationships. After drafting of a contract in accordance with the law laid down under the Indian Contract Act, 1867, it becomes essential that the contracts are enforceable. In order for the contract to be enforceable it is essential that proper stamp duty has been paid. The Indian Stamp Act, 1899 mandates the payment of stamp duty on certain types of agreements to enforce them legally in India. Therefore, before initiating any Foreign Direct Investment into India by a foreign investor either to set up a company in India or to do business in India or registering any intellectual property rights, it is important that the Contracts so signed between the foreign Investor and domestic entity are legally enforceable under the above statue.

Role of Indian Stamp Act

Collection of stamp duty is a major source of revenue for the governments and helps formalize the contractual intricacies. Stamp duty serves as an evidence or proof of transaction and can also be accepted as a valid document in evidence in the Court of Law and the reason being is that the execution of the document was witnessed by an Impartial government authority and proper stamp duty was paid.

By affixing a stamp paper or paying the prescribed stamp duty, parties showcase their compliance with legal obligations and ensure the admissibility of the contract as evidence in a court of law. The stamp duty amount varies based on factors such as the nature of the contract, the value involved, and the state in which it is executed.

The Indian Stamp Act, 1899 falls under the concurrent list as defined in the Seventh Schedule of the Indian Constitution. The concurrent list includes subjects on which both the central government and the state governments have the power to legislate. Stamp duty is one such subject that is within the legislative authority of both the central and state governments due to which every state has their own value of stamping.

Under the Indian Stamp Act, 1899, it is essential that the document is adequately stamped and in the event document is unstamped or inadequately stamped certain penalty is imposed by the appropriate government.

As per Section 59 of the Maharashtra Stamp Act, 1958, “Any person who, with the intention to evade the duty, executes or signs otherwise than as a witness any instrument chargeable with duty without the same being duly stamped shall, on conviction, for every such offence be punished with rigorous imprisonment for a term which shall not be less than one month but which may extend to six months and with fine which may extend to five thousand rupees”. For more information on the quantum of the stamp duty on the respective documents you may look for further information on https://igrmaharashtra.gov.in/pdf/documents/The_Maharashtra_Act_Schedule_1_and_2.pdf

Some of the essential business agreement that requires to be stamped by the foreign investor are the Article of Association and Memorandum of Association which have prescribed fees based on the location of the entity under Rule 10 and 39 of the Indian Stamp Act, 1899. These are the important documents required for incorporation of a company.

Another such business agreement is the share transfer deed that should be signed and duly stamped. Stamp duty is also payable on share certificate which are legal evidence of ownership, possession or transfer of shares.

In the recent judgement delivered by the Supreme Court of India, the constitution bench of Supreme Court by their judgement dated 25th April, 2023 in M/s N. N. Global Mercantile Private Limited v. M/s. Indo Unique Flame Ltd. & Ors. held that an unstamped instrument in need of stamping is not a contract and not enforceable in law. Therefore, the arbitration clause contained therein is also unenforceable. Similarly, an arbitration agreement, which attracts stamp duty but is not stamped or insufficiently stamped, cannot be acted upon.

CONCLUSION

In conclusion, stamp duty and registration are crucial components of any commercial transactions in India. Stamp duty is a tax imposed on the transfer of ownership or initiation of any commercial transaction. The amount of stamp duty varies depending on several factors, such as the value, type, location, and purpose of the transaction. Failure to pay stamp duty or register the document can lead to legal issues and financial penalties.

If you’d like to know more about the Stamp Duty in India, or want to be updated on the further information on stamping the document as per the Indian laws, please send an email to info@dandreapartners.com.

D’Andrea & Partners Legal Counsel and PHC Advisory Tax & Accounting (companies of DP Group) offer full-scale legal compliance, tax advisory support and consultancy to address any concerns related to this issue. If you have any inquiries, you are welcome to contact us: info@dpgroup.biz.

We at D’Andrea & Partners Legal Counsel are a legal firm with its presence in India, Pune and provide all round legal and fiscal services relating to open a company in India, legal compliance, litigation and dispute resolution, drafting of agreements and contracts, intellectual property rights protections, HR and IPR Related work and other miscellaneous services. Should you have any query or wish to know more, please reach us at info@dandreapartners.com. We are also pleased to introduce our practical guide on Foreign Direct Investment in India which you can purchase on https://www.amazon.com/Foreign-Direct-Investment-India-Invest-ebook/dp/B0BP7M7GKD/ref=sr_1_3?qid=1695004259&refinements=p_27%3ACarlo+Diego+D%27Andrea&s=digital-text&sr=1 3&text=Carlo+Diego+D%27Andrea

The above content is provided for informational purposes only. The provision of this article does not create an attorney-client relationship between DP Group and the reader and does not constitute legal advice. Legal advice must be tailored to the specific circumstances of each case, and the contents of this article are not a substitute for legal counsel.

Bosky Tanmay Gokani Bosky Tanmay Gokani

Bosky Tanmay Gokani

Legal Advisor
Bosky Gokani, a qualified Indian lawyer, is currently based in Shanghai.
Veronica Gianola Veronica Gianola

Veronica Gianola

Senior Associate
Veronica Gianola, an accomplished Italian lawyer, is a member of the Milan Bar Association.

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