Sucheta Dalal :Maharashtra levy has grave implications
Sucheta Dalal

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Maharashtra levy has grave implications  

May 16, 2005


The Maharashtra government appears to have back-pedalled on ordering stock and commodity exchanges to deduct stamp duty at source, as well as the quantum of duty applicable. However, the issues raised by the bizarre ordinance are far from resolved.

Last week, the Maharashtra government issued the ordinance, amending section 10B of the Bombay Stamp Act, 1958. Among other things, the amendment says stock exchanges “shall collect the due stamp duty by deducting the same from the trading members account at the time of settlement of such transactions. The stamp duty so collected shall be transferred to the Government...”

Reading between the lines of the state government clarification, it believes it has an absolute right to levy stamp duty on investors outside the state, merely because they have traded on an exchange registered or located in Maha-rashtra. And has now decided not to impose it out of magnanimity. This attitude is worrying and it is important the Securities and Exchange Board of India (Sebi) and the Union finance ministry pay attention to these actions and claims before it leads to similar decisions in other states.

Let’s first look at the ordinance. Ordinarily, one is issued when the government wants urgent action that cannot wait for the legislative process of drafting a Bill, getting it cleared by the Cabinet and having it approved by the legislative assembly. In this case, the state issued a hasty ordinance when its previously scheduled meetings with brokers, bourses and debt market intermediaries were incomplete. And when the software is not in place and no date was fixed for implementing it. Second, it was issued without any clarity on whether stock exchanges could actually collect stamp duty for Maharashtra in the manner that they collect the Securities Transaction Tax for the central government. In fact, the state high-handedly ignored the exchanges’ plea that stamp duty collection was too complex to be tackled by them.

Third, the state did not see fit to verify this claim with their regulator, Sebi, or the finance ministry, before rushing with its order. In fact, it is debatable if the state can order stock exchanges, set up under a central Act and regulated under a central legislation, to take over tax collection, which is nowhere in their mandate. Fourth, it is unlikely the state can choose not to fully implement the ordinance without a formal amendment.  

• Sebi and the Union finance ministry should stop other states doing likewise

• Gujarat’s Narendra Modi sees a great opportunity in Mumbai’s idiocy

Ironically, the architect of this ordinance seems to be a former executive director of Sebi. To be fair, the Bombay Stock Exchange (BSE) and certain Maharashtra broker associations seem to have misled state officials by quickly agreeing to a deduction of stamp duty by bourses, without figuring out the implications to large brokerage firms with branch networks across the country. Or that the deduction of duty will endanger the settlement guarantee system of bourses.

The state’s decision to convert stamp duty into a tax, by imposing it on proprietary trades where there are no contract notes issued, is another contentious issue. Whether such trades ought to attract stamp duty is a separate issue, but the high level of duty recommended will certainly dry up trading turnover. This, in turn, affects the quantum collected and also makes the market illiquid.

Is the finance ministry paying attention to the implications of the Maharshtra move? Ironically, the only person to grasp the implications of Maharashtra’s contentious stand (that it can levy stamp duty on investors outside the state) is the combative Gujarat chief minister, Narendra Modi. While Bombay brokers and as well as the trader-friendly Bharatiya Janata Party are waffling over the ordnance’s implications, Modi has announced he will not only slash or eliminate stamp duty, but will also encourage institutions to shift their infrastructure and offices to Gujarat.

Maharashtra’s bungling is typical of its attitude of disregarding commercial assets. Over the past decade, Maharashtra politicians have treated Mumbai as a milch cow, to be exploited for their personal and political ends. The decay is visible in its crumbling infrastructure and sprawling slums. The government is far more focussed on revenue-destroying moves, such as banning dance bars and shutting pubs. Unless the state decides to nurture its commercial and financial establishments, it will only succeed in driving these out.

-- Sucheta Dalal