Stamp Duty On Arbitral Awards

Coverage of this article

• Key Takeaways
• Introduction
• What exactly is stamp duty?
• What exactly is an arbitral award?
• Status of stamp duty of arbitral awards in India
• Consequences of non-payment of stamp duty 
• Arguments for stamp duty on arbitral awards
• Arguments against stamp duty on arbitral awards
• Practical challenges 
• Conclusion

KEY TAKEAWAYS

• Stamp duty on arbitral awards is a sensitive issue in India, with some states demanding it while others do not.
• Stamp tax on arbitral awards supporters claim that it is vital to protect government income and prevent stamp duty evasion, while opponents argue that it is an unnecessary extra cost that limits the expansion of arbitration as a form of conflict settlement.
• Stamp duty on an arbitral award is often a modest proportion of the award value, ranging from 0.1% to 0.2% of the award amount. However, in cases involving large sums of money, this can still add up to a significant amount. Failing in paying the stamp duty may result in penalties or orders.

INTRODUCTION

Arbitration is a widely used way of settling disputes between parties in a variety of businesses. It is a type of alternative dispute resolution in which parties agree to settle their differences outside of the legal system. The parties agree that their disagreement will be resolved by a neutral third party, the arbitrator. The decision of the arbitrator is known as an arbitral award, and it is enforceable as a court judgement. The payment of stamp duty is one challenge that parties may face while executing arbitral judgements. This essay will go through the notion of stamp duty on arbitral awards and how it affects the parties participating in arbitration. Dispute Resolution, whether before Civil Courts, Tribunals, or via arbitration, may be a stressful and time-consuming procedure. Any dispute resolution process concludes with the issuance of a final decision, known as a "Arbitral Award" in the case of arbitration. Frequently, the party towards whom an Arbitral Award is issued does not comply with the instructions included in the Award, whether they are for performing a specific act or making a monetary payment, etc. This forces the Award Holder to file a new lawsuit in order to "enforce" or "execute" the Arbitral Award.

In India, the procedure of implementation or enforcement is carried out before Civil Courts with territorial authority over the location of the Award Debtor's assets. While the implementation or enforcement of Arbitral Awards is plagued by a slew of issues such as procedural and administrative snags and judicial delays, one major source of concern is the payment of Stamp Duty upon an Arbitral Award.

WHAT EXACTLY IS STAMP DUTY?

Stamp duty is a charge placed on legal papers such as contracts, deeds, and various other papers that produce, transfer, or extinguishes any right, title, or interest in immovable or movable property. The stamp duty is computed as a percentage of the transaction's value or the amount that was paid, whichever is greater. The stamp duty is paid to the nation's government in order for the document to be validated and legally enforceable.

The amount of stamp duty paid on any instrument in India is determined by the stamp-related statute prevailing in the state where the document has been signed or entered into for execution or otherwise. For example, the Indian Stamp Act, 1999 (as amended by the state amendment act) applies in Delhi, whilst the Maharashtra Stamp Act, 1958 applies in Mumbai.

WHAT EXACTLY IS AN ARBITRAL AWARD?

A final and enforceable decision rendered by an arbitrator or a group of arbitrators is known as an arbitral award. After hearing the facts and arguments offered by the parties, the decision is decided. The award establishes the parties' rights and duties and is enforceable like a court judgement. The award is made in written form and signed by the arbitrator(s).

STATUS OF STAMP DUTY OF ARBITRAL AWARDS IN INDIA

The treatment of stamp duty on arbitral awards varies from state to state in India. Despite the fact that some states specifically exempt arbitral awards from paying stamp duty, others demand it. Stamp duty on arbitral awards is a hotly debated topic, with supporters arguing that it is necessary to preserve government revenue and prevent stamp duty evasion and opponents claiming that it is a redundant additional expense that impedes the expansion of arbitration as a form of dispute resolution.

The Arbitration and Conciliation Act, 1996 which oversees arbitration cases in India, makes no mention of stamp duty on arbitral awards in any detail. Instead, the relevant state acts are in charge of stamp duty on arbitral awards.

For instance, the state of Maharashtra revised its Stamp Act in 2017 to exclude arbitral awards from paying stamp duty. Whether an arbitrator was chosen by a court or by the parties themselves, all decisions made by an arbitrator are immune from the exception. Arbitration professionals in the state have applauded this exception, arguing that it would help advance arbitration as a more economical and effective method of resolving disputes.

The state of Haryana has done the same thing by exempting arbitral awards from paying stamp duty. The state's stamp law was altered by the Haryana Stamp (Amendment) Act of 2018 to exclude "any award made by an arbitrator" from paying stamp duty. Arbitral awards rendered both domestically and abroad are immune from this requirement.

On the other hand, certain states, including Delhi, Gujarat, and Uttar Pradesh, demand stamp duty are paid on arbitral awards. An arbitral award's stamp duty in Delhi is computed at 0.2% of the total award. An arbitral award in Gujarat is subject to a stamp duty of 0.1% of the total sum granted, up to a maximum of INR 500,000. The stamp duty on an arbitral award is 0.25% of the amount granted in Uttar Pradesh.

A small portion of the money granted is often used to cover the cost of stamp duty on an arbitral award. However, in situations involving large sums of money, this can still add up to a sizeable sum. If the stamp duty is not paid, the award or order may become null and void. As the entire point of arbitration is to obtain a legally binding and executable judgement outside of the conventional court system, this is an enormous danger for parties taking part in the arbitration.

CONSEQUENCES OF NON-PAYMENT OF STAMP DUTY 

A judgement rendered by an arbitrator may be deemed null or unenforceable if the stamp duty remains unpaid. Thus, the award cannot be used by the parties for enforcing their rights or compliance with their obligations arising from the arbitration-related contract or agreement. Given that the whole point of arbitration is to obtain a legally binding and executable decision outside of the conventional court system, this can be a significant danger for parties involved in the arbitration. Failure to pay stamp duty can occasionally lead to the parties concerned receiving penalties and fines as well. This may affect the parties' relationship as well as raise the arbitration's expenses further.

The arbitrator or the organisation that conducts arbitration may also be subject to the repercussions of failure to pay stamp duty. The arbitrator or the body in question may be held accountable for any losses incurred by the parties as a result of the unlawful award if it is determined that the award is unenforceable because stamp duty was not paid. In addition to having adverse effect on the arbitrator's or institution's reputation, this might lead to legal action being brought against them. Parties participating in arbitration should make sure they are mindful of the stamp duty requirements in the state where the decision of arbitration is to be executed in order to avoid the penalties of non-payment of stamp duty. To ensure that the essential stamp duty is paid on time, it is crucial to get legal counsel on the stamp duty obligations and any applicable exemptions.

ARGUMENTS FOR STAMP DUTY ON ARBITRAL AWARDS

There are numerous justifications for taxing arbitral judgements with stamps:

• Revenue for the government: The fact that stamp tax on arbitral awards brings in money for the government is one of the main justifications for doing so. A tax known as stamp duty is imposed on a number of different kinds of papers, such as contracts, deeds, and other legal documents. The government can earn income that can be utilised to pay for infrastructure and other public service improvements by levying a stamp duty on arbitral verdicts.
• Levelling the playing field: In order to level levels of competition between parties interested in arbitration and those engaging in conventional court action, stamp duty may be imposed on arbitral decisions. Parties are expected to pay a variety of fees and penalties throughout typical court proceedings, including court fees and stamp duty on court orders. The parties to arbitration are exposed to identical expenses by having to pay stamp duty on arbitral awards, which makes sure that both parties are compelled to pay the same amount.
• Encouraging compliance: Stamp taxes on arbitral awards can also be used to induce parties to arbitration to uphold their end of the bargain. Parties are more likely to take their commitments seriously and abide by the provisions of the award if there is a financial penalty for non-compliance. As a result, parties are more inclined to uphold their duties, which can help decrease the probability of problems emerging in the future.
• Promoting transparency: Last but not least, increasing openness in the arbitration process can be accomplished by adding a stamp requirement on arbitral awards. The sum granted is made public when parties are required to pay a fee for the ruling, which can assist advance transparency and responsibility in the arbitration process. This can foster trust between the parties to an arbitration and encourage the adoption of arbitration as a conflict resolution method.

ARGUMENTS AGAINST STAMP DUTY ON ARBITRAL AWARDS:

Additionally, there are a number of justifications against taxing arbitral awards with stamps:

• Increased Cost: Costs might rise as a result of adding stamp duty on arbitral awards, which would deter parties from utilising arbitration to settle their differences. Various fees, such as those for the arbitrators, are already expected of the parties involved in the arbitration. The arbitration procedure may become even more costly if extra stamp duty payments are imposed.
• Double Taxation: Stamp duty on arbitral awards is allegedly subject to double taxation, according to some. This is so because the agreements or contracts that were the subject of the arbitration already had stamp duty paid on them. It may be considered unjust double taxation to impose additional stamp duty payments on the award itself.
• Inconsistency: Creating discrepancy in the legal system is another defence offered against the imposition of stamp duty on arbitral awards. While stamp duty is sometimes only applied to court orders, it is sometimes also applied to arbitral awards. If the parties to the arbitration operate in separate states, this may cause them confusion and doubt.
• Unnecessary burden: Last but not least, some contend that the imposition of stamp duty on arbitral decisions places an undue burden on the parties to the arbitration. The goal of arbitration is to settle conflicts more quickly and affordably than via regular judicial action. Additional stamp duty charges may make arbitration more difficult and deter parties from choosing it as a dispute resolution method.

PRACTICAL CHALLENGES 

It may be challenging for the parties participating in arbitration to fulfil the stamp duty requirements as a result of the application of stamp duty on arbitral awards. Determining the right amount of stamp duty to be paid, which might vary on the award's size and the state in which it was granted, is one of the main issues. For parties participating in arbitration, particularly those operating across various states or nations, this may cause confusion and ambiguity. Another issue is the stamp duty payment deadline, which varies from state to state and might be as short as 30 days after the date of the judgement. This can be particularly difficult for parties who are spread out across various states or nations since they may need to go through a drawn-out approval procedure in order to get the money they need to cover the stamp duty. A practical issue that might arise is the failure to pay stamp duty, which can make the award void and lead to disagreements between the parties. Additionally, it may be difficult to enforce the payment of stamp duty if the party responsible is situated in another state or nation. Because of this, it may be challenging for the government to collect stamp duty as well as for authorities to carry it out. 

Arbitration agreements may be affected by the introduction of stamp duty on arbitral verdicts because parties may be hesitant to incorporate clauses for arbitration in their contracts if they think they will be charged additional stamp duty expenses. As a result, there may be a decrease in the use of arbitration to settle disputes and a rise in the use of disputes, which may be more time and money-consuming. Overall, these practical difficulties can make arbitration more expensive and time-consuming, make the arbitration process unpredictable for the parties, and make people less likely to utilise arbitration to settle disputes. Policymakers should take these issues into account and come up with solutions that encourage the use of arbitration while also making sure that the government can gain money from the enforcement of stamp duty.

CONCLUSION

In conclusion, there are both advantages and disadvantages to applying stamp duty on arbitral verdicts. While it can help the government make money and ensure that stamp duty laws are followed, it can also present practical difficulties for the parties to arbitration. These difficulties consist of figuring out the right amount of stamp duty to pay, the due date, non-payment, enforcing the due date, and the effect on arbitration agreements.

It is crucial for policymakers to approach these issues in a way that strikes a balance between the requirement for income creation and the objective of promoting arbitration as a rapid and economical method of resolving disputes. This might involve enforcing a common stamp duty policy among all states, offering detailed instructions on the stamp duty prerequisites for arbitral judgements, and resolving the logistical difficulties involved in the collection and implementation of stamp duty. The ultimate objective should be to establish a structure that promotes the use of arbitration as a dispute resolution method while simultaneously making sure that the government can make money from the enforcement of stamp duty. Policymakers can design a system which helps all parties and encourages the quick and efficient settlement of conflicts through arbitration by striking an appropriate equilibrium between these conflicting interests.