India - Stamp Duty On AIF Units.
Legal News & Analysis - Asia Pacific - India - Tax - Capital Markets - Regulatory & Compliance - Capital Markets
22 July 2020
The Securities and Exchange Board of India has directed that the sale, transfer and issue of units of alternative investment funds (‘AIFs’) are subject to stamp duty from July 1, 2020.
Applicability of Stamp Duty
• The amendments to the Indian Stamp Act, 1899 (effective from July 1, 2020) provided for payment of stamp duty on issuance and transfer of securities (other than debentures), to bring in uniformity and affordability of stamp duty. The definition of ‘securities’ included securities under the Securities Contracts (Regulation) Act, 1956 and any other instrument declared by the Central Government.
• Since there was no specific inclusion of AIF units in the definition of ‘securities’, SEBI issued a Circular and the Department of Economic Affairs released a set of frequently asked questions (FAQs), both dated June 30, 2020, to clarify questions on payment of stamp duty on AIF units.
• Issuance of AIF units will attract a stamp duty of 0.005% of the value of units, i.e. contribution made by the contributor excluding other charges such as service charge, management fee, goods and services tax (GST) etc.
• Transfer of units on delivery basis will attract a stamp duty of 0.015% whereas transfer on a non-delivery basis will attract a stamp duty of 0.003%, in each case on the transfer consideration. No stamp duty will be payable on redemption of units.
• The FAQs have clarified that stamp duty for transaction in units of AIFs in statement of account/physical form will be collected by Registrar to an issue/ share transfer agents (‘RTA’) and in demat form will be collected by a depository in terms of Section 9A of the Stamp Act.
• In order to facilitate a seamless transition, the Circular has allowed AIFs a grace period till July 15, 2020 for appointment of RTAs and collection of stamp duty on transactions in AIF units. Until the appointment of the RTA, AIFs are required to collect the stamp duty in a designated bank account and upon appointment, such amounts will be transferred to the RTA.
Stampable Value of Units
• Stamp duty would be charged as fund expenses by the manager and hence, fund expenses attributable to stamp duty payments on units will need to be necessarily excluded while calculating the stampable value of units to avoid double-counting.
• Many AIFs have issued partly paid units wherein the units have already been issued at the time of initial drawdown. Given that the stamp duty is payable on the value of units and in case of partly paid unit, the units are issued on the capital commitment, the stamp duty will be payable on the entire value of units, i.e. capital commitments.
• The FAQs have clarified that charges such as service charge, management fees and GST etc. should be excluded while calculating value of units for stamp duty payment.
This has resulted in ambiguity whether organisational expenses which are typically charges for setting up the AIF, fund expenses in the nature of taxes, withholdings, stamp duties, filing fees, registrations fees, licensing fees, and Government charges should be excluded while calculating the value of units, in addition to management fees and GST thereon.
Further, given that units are issued for the entire amount of capital contributions received by the contributor it will require the manager to make accounting reconciliations between the units issued and the stampable value of units.
Stamp Duty on Contribution Agreement
• The contribution agreement and unit certificate/statement of account will be considered as two separate instruments and hence, will need to be stamped separately as separate transactions. In certain States, such as Maharashtra, agreement to purchase marketable securities is stamped under a separate entry and therefore, the question arises whether the contribution agreement will have to be stamped as an agreement to purchase securities.
Managers in the process of setting up new AIFs should appoint RTA as one of the service providers prior to the initial closing. Managers of AIFs that are in the process of fund-raising or making draw-downs will also need to factor in the stamp duty implications and compliances.
For further information, please contact:
Zia Mody, Partner, AZB & Partners