India Inc may soon find it a lot cheaper to issue debt paper, as the government is set to reduce and rationalise stamp duty on various instruments. The finance ministry is initiating discussions with state finance ministers in order to reduce stamp duty rates on instruments like debentures, bonds and promissory notes. Although states had in-principle agreed to reduce stamp duties on debt papers to make them uniform across the country, the government is yet to finalise the new rates. Official sources said the finance ministry would now formalise the uniform duty rates on various debt instruments after consulting with the states. “The new duty rates would be worked out after discussions. These would be substantially lower than the present charges,” a government official said. The reduction in duties would, naturally, lower the cost of issuing these papers and eliminate the arbitrage that currently exists because of the inter-state variations. It could also encourage retail investors to buy such papers since they will have to pay lower stamp duties. The highest stamp duty on debentures is 0.375 per cent ad valorem (as a percentage of issue size), while on promissory notes it is 0.05 per cent. Moreover, differences between state stamp duty rates are significant. For instance, the stamp duty on certain instruments in Maharashtra is almost ten times lower than in Delhi; as a result, a large chunk of deals in the debt market originate in the commercial capital. The move to rationalise stamp duties is in line with global practice. Countries like Singapore and Malaysia do not even levy duty on debentures. It is also part of a broader initiative to widen and deepen the debt market, which remains tiny compared with the equity market in India.The government would amend the Indian Stamp Act, 1899 — which overrides stamp duty laws across all states, except in Jammu and Kashmir — to facilitate the new rates. The R H Patil committee on corporate bonds and securitisation has also suggested that stamp duties on various debt instruments be rationalised and made uniform.The committee had suggested fixing stamp duty rates on the basis of the tenor and the issue of an instrument to encourage short-term debt papers. It further recommended that corporate bonds be exempt from tax deducted at source (TDS) on the lines of government securities. Finance minister P Chidambaram has announced in Budget 2008-09 the exemption of corporate bonds from TDS.Widening the debt market• Reduction in duties would lower cost of issuing papers and eliminate arbitrage • Reduction could also encourage retail investors to buy papers as they will have to pay lower stamp duties• Govt would amend the Indian Stamp Act, 1899, to facilitate the new rates• R H Patil committee had suggested fixing stamp duty rates on the basis of tenor and issue of an instrument to encourage short-term debt papers
