The Constitution of India under the State List (List II) empowers states to levy stamp duty on the conveyance of immovable and movable property
This column has highlighted issues in the past related to double taxation and overlap between federal and state levies as far as taxation of goods and services are concerned. This article discusses a potential case of double taxation on a transaction of sale of goods between two state-level taxes.
The constitution of India under the State list (List II) empowers States to levy stamp duty on the conveyance of immovable and movable property. States are also empowered to levy taxes on sale of goods. It is a widely held belief that stamp duty is attracted only on immovable property. However this is incorrect – it is in fact applicable on conveyances of both movable and immovable property.
Therefore, there is a situation where a transaction could attract both stamp duty and VAT. Let us understand this with the help of an example. A company sells one of its factories on as is where is basis', consisting of land, factory building and plant and machinery. It may also have the buyer hire the people that are employed in the factory. The way such transactions are typically completed is that they are carried out under several steps. First, the parties enter into an agreement of sale, which lays down the overall parameters of the transaction, such as the consideration, the assets that are to be transferred, etc. An agreement of sale typically also has several conditions which need to be satisfied before the transaction can be completed, such as the conduct of a due diligence by the buyer.
After completion of all steps contemplated in the agreement of sale, sale deeds are drawn up for the immovable property and appropriate stamp duty and registration fees duly paid on the consideration for immovable property. The plant and machinery in the factory is sold at a consideration that is included in the taxable VAT turnover of the seller and VAT is discharged on the sale consideration.
This is broadly the fact pattern that was applicable in the case that was examined by the Supreme Court in Duncans Industries Ltd. v. State of UP & Ors. (AIR 2000 SC 355). In this case the Supreme Court ruled that the plant and machinery was immovable property as it was embedded in the ground.
Further, the Supreme Court also rejected the contention of the seller that the plant and machinery was transferred by delivery. The court held that unless the machinery was physically removed from the factory and delivered to the buyer at some other location, it would not be considered to be a sale of goods, which are transferred by delivery. Therefore, it would be construed that the sale deed for the immovable property should have also been stamped with the value of the plant and machinery.
If the position was reasonably clear-cut that a sale of a factory would attract only stamp duty and would not attract VAT, that would probably be acceptable to industry. However, all such transactions have several items of plant that are embedded in the ground and many other items that are movable in the factory.
Even with respect to the items that are embedded in the ground, there would be many that can easily be removed and transported to any other location if required.
Therefore, a person entering into such a transaction has to face considerable uncertainty on the extent to which VAT is applicable on the transaction, along with the prospect of double taxation, since stamp duty would also be applicable.
The overall principle of indirect tax reform in India is to eliminate the cascading of taxes. Since stamp duty is a tax that is not creditable to the payer, it forms part of cost. Therefore, the incidence of stamp duty should be minimised to the extent possible. Therefore, we would suggest that states should have an exemption to the extent of value of plant and machinery, in the value of a conveyance on which stamp duty is to be paid.
The portion of plant and machinery that consists of movable property would be subject to VAT. (This is assuming that the transaction is not exempt from VAT as a sale of business.
However, that might be the subject of another article, some other time.)
This would effectively mean that there should only be VAT in the State to tax transactions of sale and purchase pertaining to movable property.
The levy of stamp duty on the value of the immovable property is well understood and does not present any difficulty in compliance.
However, the current position is one of uncertainty and double taxation. This is not a welcome state of affairs, particularly when the taxing jurisdiction for both VAT and stamp duty is the same.