Overview Implication of Stamp Duty on Scheme of Arrangement

Implication of Stamp Duty on Scheme of Arrangement (Merger & Amalgamation)

Mergers and amalgamations are critical instruments in corporate restructuring and expansion strategies. However, a key legal and financial component that is often underestimated is stamp duty—a transaction-based tax governed primarily by state laws in India. Our this blog delves into one of the most crucial yet overlooked aspects of M&A transactions, i.e. the ramifications of stamp duty on Schemes of Arrangement under Sections 230-232 of the Companies Act, 2013.

Introduction

A Scheme of Arrangement, as provided under Sections 230-232 of the Companies Act, 2013, is a legal framework enabling corporate restructuring, including mergers, amalgamations, demergers, and capital reorganization. While obtaining NCLT approval is a key step, stamp duty implications represent a critical financial and legal consideration in executing such schemes.

We can Find details in the Article like State-wise stamp duty rates on mergers and demergers, Valuation principles used for calculating duty, Exemptions and reliefs available in select states, Compliance requirements and consequences of non-compliance. Read the full article to gain actionable insights into how you can structure transactions more efficiently and ensure full compliance with state stamp duty laws.

What is Stamp Duty?

Stamp duty is a statutory tax levied on instruments evidencing transactions, including those involving the transfer of assets during mergers or demergers. It serves both as a source of revenue and a validating mechanism for the enforceability of documents. Stamp duty is levied at the state level, and each state has its own rate structure, valuation method, and treatment of NCLT orders as instruments liable to stamp duty. Failure to comply with applicable stamp duty provisions can result in:

• Penalties and interest
• Inadmissibility of documents in court
• Delays in transaction execution

Court vs. Contractual Route: Whether a restructuring is executed through a court-sanctioned Scheme of Arrangement or a contractual arrangement, the stamp duty treatment varies significantly across states. Understanding this distinction is essential for accurate cost estimation and risk mitigation.

Applicability of Stamp Duty in Schemes of Arrangement

• Mergers & Amalgamations: Stamp duty is typically payable on the transfer of movable and immovable assets and liabilities from the transferor to the transferee company. Duty is calculated on the market value of the assets.
• Demerger: In the case of a demerger, stamp duty is applicable on the assets transferred to the resulting company based on their market value.
• Capital Reduction: If the Scheme involves a reduction of share capital, stamp duty may be imposed on the NCLT order effecting the reduction.

Valuation for Stamp Duty

The calculation of stamp duty often necessitates a professional valuation of:

• Movable & immovable assets,
• Consideration paid,
• Shares issued or cancelled.

This is done to determine the highest applicable base for duty calculation (often “whichever is higher” rule applies).

Exemptions and Reliefs

Certain state governments offer exemptions or concessional rates, especially if the Scheme is court-sanctioned (NCLT order). Examples include:

• Andhra Pradesh & Telangana: Nominal stamp duty of INR 2 per INR 100.
• Maharashtra: Cap-based duty with different rates for amalgamation and demerger.
  It is essential to review State-specific Stamp Acts and any notifications or circulars granting relief.

Compliance & Documentation Requirements

To ensure enforceability:

• Assess Applicable Duty: Based on asset valuation and legal structure.
• Timely Payment: To avoid penalties and interest.
• Documentation: Include stamped copies of NCLT order, valuation reports, board resolutions, etc.

Implications of Non-Compliance

Non-payment or underpayment may result in:

• Penalty and interest liabilities,
• Inadmissibility in court of unstamped instruments,
• Delays in scheme implementation and legal recognition of transfers.

State-wise Stamp Duty Rates on Scheme of Arrangement

State	Stamp Duty Rate
Andhra Pradesh / Telangana	INR 2 per INR 100 of market value
Chhattisgarh	7.5% of MV of immovable property or 0.7% of aggregate MV of shares issued and consideration paid
Madhya Pradesh	5% of MV of immovable property or 0.5% of shares/consideration
Gujarat	1% of MV of shares issued or face value, or 1% of MV of immovable property (Max INR 25 Cr)
Karnataka	3% on MV of property within Karnataka, or 1% of shares/consideration
Kerala	2% of MV of immovable property or 0.6% of aggregate MV of shares/consideration
Maharashtra	Amalgamation: Max 5% of MV of immovable property or 5% of MV of shares issued. Demerger: Max 5% of immovable property or 0.7% of MV of shares issued
Rajasthan	4% of aggregate MV of shares issued or cancelled, or MV of immovable property, whichever is higher
West Bengal	2% of MV of immovable property or 0.5% of aggregate MV of shares/consideration, whichever is higher (subject to caps)

Note: Several states include NCLT orders under the definition of “conveyance” in their respective Stamp Acts post the 2017 amendment to the Indian Stamp Act.

Stamp Duty Implications on Scheme of Arrangement: Exemptions, Judicial Standpoint & Recent Developments

The levy of stamp duty on Schemes of Arrangement, such as mergers, amalgamations, and demergers, has emerged as a key concern for corporates, particularly in cross-state and high-value transactions. While judicial precedents have affirmed the stampability of NCLT orders sanctioning such schemes, certain statutory exemptions and clarifications—especially for Government entities—bring important relief.

Statutory Exemption for Government Companies – Section 8G, Indian Stamp Act, 1899

Introduced by the Finance Act, 2021, Section 8G of the Indian Stamp Act, 1899, provides a significant exemption:

No stamp duty shall be levied on instruments for conveyance or transfer of business, assets, or rights in immovable property when executed between Government companies (including subsidiaries, joint ventures, or units) and another Government company or the Central/State Government, if The transaction is approved by the Central or respective State Government; and It is carried out via strategic sale, disinvestment, demerger, winding up, strike-off, or liquidation.

This provision reflects a policy intent to ease internal reorganizations within public sector undertakings (PSUs) and reduce the transaction burden during strategic restructurings or closures.

Judicial Precedents on Stamp Duty in Schemes of Arrangement

Indian courts have repeatedly clarified that an NCLT (or previously, High Court) order sanctioning a Scheme of Arrangement qualifies as an “instrument” and may be liable to stamp duty under state laws.

Key Judgments on Stamp Duty in Schemes of Arrangement

• Li Taka Pharmaceuticals Ltd. v. State of Maharashtra : Bombay HC held that an order under Section 394 of the Companies Act, 1956 is an instrument evidencing transfer under a scheme.

• Hindustan Lever v. State of Maharashtra (SC) : The Supreme Court ruled that an order of amalgamation is an “instrument” and the legislature can impose stamp duty on such orders.

• Delhi Towers Ltd. v. GNCT of Delhi : Delhi HC emphasized that the absence of express statutory amendments in a particular territory (e.g., Delhi) does not preclude levy of stamp duty on sanctioned schemes.

• Emami Biotech Ltd. v. State of West Bengal Calcutta HC held that a court order under a Scheme of Amalgamation is both a conveyance and an instrument, liable to stamp duty.

• Reliance Industries Ltd. (Chief Controlling Revenue Authority case) : Bombay HC ruled that each High Court’s sanction order in a cross-jurisdictional merger is independently chargeable to stamp duty.

• Holcim (India) Pvt. Ltd. v. Collector of Stamps, Delhi : Delhi HC clarified that no stamp duty is chargeable on transfer of dematerialized shares under a scheme.

Finance Act, 2019 and Stamp Duty on Securities

With effect from 1 July 2020, the Finance Act, 2019 centralized the levy and collection of stamp duty on securities transactions, including those under a Scheme of Arrangement:

• Section 8A: Limits exemptions to securities transferred to/from a depository and a beneficial owner.

• Article 56A: Imposes stamp duty @ 0.005% on issue of shares under a Scheme of Arrangement, calculated on the value of shares issued.

This shift has streamlined the uniformity in securities stamp duty, though state-specific rules still apply for immovable property and business assets transferred under such schemes.

Conclusion

• Stamp duty is a significant financial implication in corporate restructuring through Schemes of Arrangement. Companies must Assess state-wise duties carefully, Plan for valuation and documentation, and Ensure timely compliance to avoid legal and operational risks.
• The levy of stamp duty on Schemes of Arrangement is settled law, with judicial pronouncements across jurisdictions confirming that NCLT orders are “instruments” subject to duty. However, the complexity arises from Divergent state laws, Valuation challenges, Transaction structuring (shares vs. assets, immovable vs. movable), Applicability of exemptions for Government entities.
• Thus, businesses, especially those undergoing large or multi-state restructuring, must undertake advance legal and financial due diligence, ensure accurate stamp duty computation, and evaluate exemptions or caps available to mitigate transaction costs and avoid regulatory pitfalls.