Stamps and Stamp Duty – A Look into Types and Concepts
We have all used stamps and we have all heard about stamp duties. But, have you ever wondered on how many different types of stamps are there? Have you ever given a thought on what really stamp duty means? Have you ever thought what happens to the money you pay for stamps? Just in case you have never thought of these questions, we will like to borrow some time of yours and walk you through the answers of these questions. Hold on! This article is going to be slightly long because there are a number of things we need to consider. However, on an average, you should finish reading this article in about 6-7 minutes.
Let us begin with stamp duty!
So, what precisely is stamp duty? It is basically a tax that we pay. Lucky for us, we don’t pay it regularly. There are specific legal documents by a written legislative authority that we usually refer to as statute. So, not all legal documents are subject to stamp duty.
When we talk of stamp duty, there are basically two types:
- Fixed Stamp Duty: This is pretty self-explanatory, right? This tax remains fixed.
- Ad Valorem Stamp Duty: Simply put, this is not fixed tax. It varies. The amount of tax or duty that will be charged is dependent on property or service or product on which the duty is charged.
- Union List’s Entry No 91 has a list of documents which attract stamp duty. Taxes on these documents are charged by Union. These documents include:
- Credit letters
- Insurance policies
- Receipt transfer
- Proxy transfer
- Debenture transfer
- Share transfer
- Bill of Lading (BOL)
- Promissory notes bill
- Cheque bill
- Exchange bill
- Article 268 of the Constitution states that if stamp duty is collected in a State, the State will have the right of retaining collected duty.
- Article 268 of the Constitution also says that if stamp duty is collected in a Union Territory, all duty or tax proceeds are actually a part of India’s Consolidated Fund.
As per the Constitution
What happens to the money we pay as stamp duty?
Good question! We have already answered a part of the question. All money collected as stamp duty in States is retained by States where as all money collected as stamp duty in Union Territories is considered as India’s Consolidated Fund.
However, in case of States, there can be stamp duty of documents or stamp duty on instruments. All money collected as stamp duty on instruments which are non-commercial by nature is taken by Union Legislature.
So hey, what is a document and what is an instrument?
We expected this question. Let us take a look!
- A Document: We will skip the formal definition and put it in simple words. It is a written record on a piece of paper where two parties that are involved in any kind of transaction (for example a property purchase) agree to conditions and terms that are written down on the paper (here we call it as Document). A Document when stamped is considered legal and authentic and involved parties need to abide by the set of conditions as written down on the Document. If any party violates the conditions, the other party has the right to take legal steps against party that violated the conditions.
- An Instrument:Let us ask you a simple question. Looking at hardware such as hammer and chisel, what comes to your mind? Well, the first thing you will think is that they are instruments that you can use for creating or destroying something. Right? An Instrument our context here is also a tool that is required for creating or destroying something. The only difference is that the instrument in this context is a piece of paper and not hardware. So basically, an Instrument is a piece of paper too! Despite being a piece of paper, there is a significant different between an Instrument and a Document. An Instrument is when a liability or a right is to be extinguished or recorded, limited or extended or even created to transferred.
Let us look into some other concepts
Coming back to stamps, there two different concepts:
- A Non-Judicial Stamp: This is a stamp paper which is used for document execution (that is enforcing or completing a mutual agreement between two parties) for example handing over power of attorney, commercial agreement, rent agreement, property transfer etc.
- A Judicial Stamp: This too is a stamp paper but is different from a non-judicial stamp paper in the sense that it is used for payment of court fee and hence, it is also known as Court Fee Stamp. This stamp is used for activities like lodging a civil complaint or a petition etc.
Stamp types – broad categories
Okay, now that we have learned a concept or two about stamps, let us take a look at the different types of stamps that are available. Let us start with broad classification. Stamps are broadly classified as:
- Impressed Stamps
- Adhesive Stamps
It is time that we take a look at these stamp variants individually:
Impressed Stamps are:
- Labels that are affixed as well as impressed by an officer.
- Stamps found on stamp papers in engraved or embossed state.
- Franking machine created impressions. This practice is usually carried out by banks. Banks simply deposit the tax or the duty with bank account and create the impressions usually on non-commercial instruments. Commercial instruments are usually not taken care of in this fashion because commercial instruments use high value stamp papers and collecting the stamp duty can be a difficult task.
Adhesive Stamps are:
Usually small paper stamps are simply stuck or pasted on an instrument using an adhesive. They are pretty convenient.
Subcategories of Stamps
Now that we have taken a look at the broad categories of stamps, let us take a look at further subcategories. You need to remember that Impressed Stamps do not have subcategories. Adhesive Stamps however have sub categories which are:
- Postal Stamps
- Non-Postal Stamps
Let us take a look at each of these subcategories separately.
These are the stamps that are specifically designed for usage with Post Offices and also with services that are related with Post Office. The stamps here are paper ambassadors and are reflection of a nation’s heritage.
Simply, they are not used for postal usage. There are again different types of non-postal stamps and each one of them have different functions. Let us take a look at the variants of non-postal stamps:
- Brokers’ Note or Stamp: When a transaction takes place through a broker, this type of stamp is used, reflecting the broker fee.
- Foreign Bill Stamp: When money goes out of India in form of promissory notes or exchange bills, this stamp is used.
- Notary Stamp: Only a notary officer can use this stamp. It is used right under the notarial seal to attest and certify.
- Revenue Stamp: When there are transactions that involve money, a revenue stamp is stuck on the money receipt.
Apart from the list of non-postal stamps that are already mentioned, there are several other types of non-postal stamps which include:
- Insurance Policy stamp.
- Court Fee stamp.
- Share Transfer stamp.
- Special Adhesive stamp etc.
Stamp duty on Instruments
We learned earlier that Instruments too attract stamp duty but there are there are two different scenarios that are to be considered. Let us take a look at each scenario separately:
Scenario 1: One transaction against several instruments
In this scenario, two involved parties can carry out a single transaction against multiple instruments which are required for different matters. For instance, in case of sale or settlement or mortgage or all three at once will require different instruments but instead of carrying out different transactions, the parties may agree on a single transaction to cover all costs. So essentially, there will be one transaction against multiple instruments. In such scenarios, Schedule 1-B of Stamp Duty Act kicks in.
According to this schedule, the instrument which has the highest tax or duty is selected and the full duty is paid. For the rest of the instruments, only INR 5.00 is paid per instrument.
Scenario 2: One transaction against one instrument
There may be conditions where one transaction cannot be used for all matters at once. In such a scenario, every matter is associated with its individual financial transaction. Here, stamp duty for every single instrument is to be paid in full.
How is the stamp duty charged?
The modus operandi for charging stamp duty is quite interesting. Let us take a look at the same.
- When a security or a debenture or a bond goes out as loan, 1% of security or debenture or bond value is charged as stamp duty. Unless and until the loan is renewed, recollecting the stamp duty again is prohibited by law. However, in order to charge stamp duty, the security or debenture or bond has to be stamped mandatorily.
- If an exchange bill is handed over as security or if an instrument (which is not a promissory note) is handed over as security against a loan (already advanced or yet to be advanced) or a debt (existing or future), stamp duty is charged.
- Again, a stamp duty will be considered charged in case any duly stamped instrument (apart from a promissory note) or a duly stamped exchange bill is used for redeeming a transfer.
How is the stamp duty paid?
Now that we know how stamp duty is charged, it is important to know how this tax is paid. Stamp duty can be paid via:
- Stamps (As per Stamp Duty Act’s Section 10).
- Cash (As per Stamp Duty Act’s Section 10A).
Payment via stamps
This happens when you purchase a stamp. The money goes to the government. However, it is necessary to take a look at the different types of stamps that will be required for different types of instrument. We will use a tabular format.
|Instrument Type||Stamp Type Required for Stamp Duty Payment.|
|For instrument of each kind||The instrument will come with stamp type description. The description itself will denote that the stamp duty has been paid for that particular instrument.|
|Instruments that have been stamped using impressed stamp||The total number of stamps that have been used will denote payment of stamp duty.|
|For promissory notes as well as exchange bills||The paper size on which the promissory note or the exchange bill has been written will denote payment of stamp duty.|
Payment via cash
The payment for stamp duty can be collected in cash only when:
- There are no stamps available for purchase for certain specific denominations.
- A district is plagued by a temporary shortage of stamps.
Cash payments will be supported with a challan which acts as a piece of evidence that the stamp duty has been paid. Also, the cash is to be paid only to the officer who has been authorized to collect the cash.
What if an impressed stamp is spoiled?
This is a viable question. It may happen that an impressed stamp gets spoiled because of several reasons. In such a case, a person is free to claim allowance against the stamp that has been spoiled. In order to claim allowance against a spoiled impressed stamp, one needs to get a certificate from the collector. This is mentioned in Section 32 of Stamp Duty Act.
Also, allowance can be claimed only and only when the impressed stamp has been spoiled because of any of the undermentioned conditions:
- A writing error or some other error.
- A party has not signed the stamped document.
- A promissory note that has never been used in any possible manner.
- Exchange bills that have not been accepted despite being signed.
- An executed instrument has become void over course of time.
Unless and until any one of the above conditions are not satisfied, allowances on spoiled impressed stamps will not be provided.