Recently, the government mandated the conversion of shares of private companies into dematerialised form. This requires the physical share certificates which are often held by foreign shareholders outside India to be brought back to India for dematerialisation. In this backdrop, many companies are grappling with the question of whether customs duty applies to the import of such certificates.
While customs duty is typically levied on imported goods, the unique nature of share certificates raises concerns. Unlike tangible goods with market value, share certificates represent ownership of shares traded in the market. This raises the question of whether the value of the shares is tied to the certificate itself or if it is merely a document confirming ownership. These certificates cannot be sold in the market as such. In case anyone buys the shares of the company, a new certificate is issued to that person and the old certificate holds no value. This distinction is crucial as it affects the duty payments significantly due to the disparity between the value of the paper certificate and the underlying shares.
It is interesting to note that the doubts do not stop there. There are additional concerns regarding whether these certificates should be imported via courier or personal baggage. The customs tariff item 49070090 covers share certificates, leading to arguments that this classification applies when certificates are imported via courier. However, there is another entry under the Customs Tariff Act stating that if dutiable goods are carried in personal baggage without declaration, these are classified under customs tariff item 98030000. It is worth noting that the customs duty rate under both entries is different, one attracts a significantly lower rate whereas another attracts a higher rate of customs duty.
Re-import benefit
Many industries are also considering to explore the option to avail the benefit of re-import under the customs law. However, in many cases, these certificates were not exported but sent to shareholders along with the employees, which restricts the eligibility of re-import benefit. Questions have been raised as to whether at the time of export of share certificates (after dematerialisation as these certificates will be cancelled) these will be identifiable goods.
Previously, the Central Board of Excise and Customs issued Circular No. 60/2000-Cus on July 12, 2000, clarifying the levy of customs duty on share certificates imported for sale or dematerialisation. It stated that all goods exported from India and subsequently re-imported are liable to duty, subject to conditions and restrictions under section 20 of the Customs Act. Nonetheless, exemption is provided under notification No. 94/96-Customs, dated December 16, 1996, for certain categories of Indian origin goods when re-imported, subject to specified conditions. As is evident, the Circular specifically addresses shares held by NRIs abroad, re-imported for sale or dematerialisation and provided only limited relief to the industries.
Given the uncertainties outlined above, this is an issue which is ripe for filing a representation seeking clarification. It is crucial for the government to provide clarity on the imposition of customs duty on the import of share certificates by way of a clarification, extending beyond mere re-import scenarios.
Mukherjee is Partner, and Bhardwaj is Principal Associate, Lakshmikumaran & Sridharan Attorneys