The Stamp Duty Tug-Of-War: Can The Centre Override State Powers in SEZs?

[Yatharth is a student at National Law University Delhi.]

The Special Economic Zones (SEZ) Act 2005 brought in various fiscal benefits for the developers and units, but one of its provisions has produced a constitutional question that is yet to be resolved. Through an amendment to the Indian Stamp Act 1899, the law brings in an exemption for SEZ-related instruments from stamp duty. The problem, however, is that for most commercial instruments executed in India, stamp duty is not levied under the law at all. It is levied under standalone state statutes such as the Maharashtra Stamp Act 1958 and the Karnataka Stamp Act 1957. The question, therefore, arises as to whether a Parliamentary amendment to a central statute, backed by a derivative clause, takes away the states' power to levy stamp duty on instruments within their own legislative field.

This piece argues that it cannot. That power has been bestowed to the States, and nothing in the SEZ Act displaces it. There has been a divergence among the HCs on the issue. The Gujarat High Court in Torrent Energy v. State of Gujarat is often cited for an expansive, exemption-favouring reading, but the Karnataka High Court in Shyamaraju & Co v. Union of India takes a sounder view confining the SEZ relief to the duties the law actually represents.

The Constitutional Design

The Seventh Schedule splits the power to levy stamp duty. Entry 91 of List I allows the Parliament to fix the rates of duty on certain commercial instruments such as bills of exchange, promissory notes, transfers of shares, debentures, receipts and a few others. Entry 63 of List II lets the state legislatures fix the rates on every other instrument. Entry 44 of List III makes the law of stamp duties concurrent but expressly excludes the rates of duty from that concurrence.

This design is deliberate. The substantive law of stamping is shared, but the quantum of levy is divided amongst the state and the centre based on the instrument. The Indian Stamp Act occupies the Union's share, while certain states have their own complete codes. An exemption provided by the Centre can only prevent the levy of duty on the instruments falling inside Entry 91. For all the other instruments, the states reserve the power to decide the quantum.

What the SEZ Law Actually Grants

The statute grants relief through two different routes, and conflating them causes most of the confusion. The first is Section 26, which lists the exemptions available to developers and units: customs duty, excise, service tax, central sales tax, the securities transaction tax and similar central levies. Stamp duty under a state statute appears nowhere in this list. Parliament cannot, through a list of concessions in its own statute, remit a tax reserved to the states.

The second route is the Third Schedule, which amends the Indian Stamp Act 1899. The stamp exemption enters here, not through Section 26. The amendment inserts a proviso into Section 3 of the statute exempting instruments executed by, in favour of, or in connection with the purposes of an SEZ, a proviso the Madras High Court read broadly in Embassy Property Developments v. Inspector General of Registration, extending it even to non-SEZ land used for SEZ purposes.

The statutory scheme also has an important jurisdictional implication. The amendment operates on the Indian Stamp Act 1899 and reaches only instruments that the law governs, meaning Entry 91 instruments and the instruments in states that have adopted the central law. It cannot be read into states having their own codes. The Madras HC in Embassy Property aims to answer the problem for the states that apply the Indian Stamp Act 1899; the ruling stands right on its facts, however, it leave the question open for states with their own codes.

The Judicial Split

The decisions are more reconcilable than they look. In Navi Mumbai SEZ v. State of Maharashtra, the Bombay High Court applied the Maharashtra Stamp Act 1958 to SEZ instruments without treating the SEZ Act as having sweeping effect over it. In Shyamaraju, the Karnataka High Court anchored its reasoning firmly in statutory interpretation rather than constitutional federalism. The court noted that there is no general stamp duty exemption for units, and that since the exempt duties are listed in Section 26, and Section 51 overrides other laws only to that extent, relief is confined to the specified duties. The clause amplifies the exemptions the Act grants rather than inventing new ones, resolving the issue through the strict textual limits of the SEZ Act 2005 itself.

The pattern, hence, is clear. If the state applies the Indian Stamp Act 1899, the exemption would apply, and if it has its own code beyond the reach of the amendment, the amendment would not apply, unless one accepts the maximalist reading of Section 51, a reading rejected by the Karnataka High Court through its textual interpretation of Sections 26 and 51.

Why Torrent Energy Has No Universal Application 

Torrent Energy is the decision most often used to argue that the SEZ regime overrides state fiscal law. The Gujarat High Court held in the case that the derivative clause in the SEZ legislation prevailed over later amendments to the state VAT law, so purchase tax could not be levied on inputs supplied to SEZ units. Two features make it inapplicable in the stamp duty context.

For one, the case deals with a different category. Torrent Energy concerned the Gujarat SEZ Act 2004, a state statute, and its clash with another state statute, the Gujarat VAT Act. The question was which of two laws made by the state should prevail. That a special state SEZ law beats a general state tax law says nothing about whether a central SEZ law can override a state stamp law. The actual question concerns the principles of federalism and the distribution of powers between the state and the centre.

Second, and more fundamentally, a derivative clause is exploitative. It carries no content of its own and only gives overriding effect to a substantive provision found elsewhere in the same statute. In Torrent Energy there was such a provision to protect. The Gujarat SEZ Act 2004 expressly exempted units from enumerated state taxes, including sales and purchase tax.

The stamp duty situation is the mirror image. The central SEZ Act 2005 contains no substantive exemption from state stamp duty. Section 26 does not list it. The only stamp exemption in the scheme is the Third Schedule amendment, which operates on the Indian Stamp Act 1899, not the state codes. A derivative clause cannot manufacture an exemption the statute never granted. It can only protect one that exists. Torrent Energy never asked its clause to do otherwise, and that is the distinction the case misses.

The Case for State Power

Fiscal provisions are read strictly, and exemptions are construed with no room for intendment. Had Parliament meant to extinguish the states' power over stamp duty on SEZ instruments, Section 26 was the place to say so. The silence cannot be read as an exemption.

While the courts have largely confined their restrictive approach to interpreting the scope of Sections 26 and 51, the constitutional distribution of powers offers an independent and compelling argument against the Centre's override. Federalism is the strongest point. The power to fix rates on non-Entry-91 instruments is exclusively the states' under Entry 63, and an exemption is a nil rate. A reading that exempts commercial agreements from state stamp duty therefore has Parliament legislating, through an overriding clause, on a field reserved to the states. The court's recent affirmations of Section 51's strength all arose in customs cases, a Union subject where no trespass on state competence was possible. In Adani Power v. Union of India, the court treated the SEZ Act as a self-contained code in its own domain. That confirms the law's force within Union subjects; it does not license it to cross into Entry 63. Stamp liability is also territorial, as New Central Jute Mills v. State of West Bengal held that a liability arising in one state cannot be discharged in another. The duty is the state's to impose, and the state's to remit.

One might invoke generalia specialibus non derogant, as the court did for the company law and the Bombay stamp law in State of Maharashtra v. National Organic Chemical Industries. However, that maxim resolves conflicts; it does not create them. There is a conflict only where the special law says something contrary to the general law, and the central SEZ Act 2005 says nothing about state stamp duty. Silence is not inconsistency.

Conclusion

Properly construed, the SEZ Act 2005 exempts from stamp duty only what it has the competence and the language to exempt, which is the field of the Indian Stamp Act 1899. For instruments under the state codes, the power to levy or exempt stamp duty should stay with the states under Entry 63. Neither Section 26 nor Section 51 should change that.

When the Supreme Court settles the matter, it will have to choose between a better commercial incentive versus a fair federal principle. It should uphold the federal principles. Stamp duty on commercial instruments is a state levy by constitutional design. If SEZ units in high-duty states are to enjoy relief, it should come from the states that own the tax, not from an overreading of a central clause that does not reach so far.