The government plans to offer stamp duty exemption for sale of accounts receivables, allowing businesses to encash sales made on credit and ensure a healthy cash flow.

The finance ministry will facilitate this change by moving a new bill to regulate factoring business and to amend the Stamp Act, 1899. The Factoring and Assignment of Receivables Bill 2010 will be placed before the Union Cabinet ahead of the budget session of Parliament that begins in February.

Stamp duty exemption will allow companies to get their bills discounted easily by banks or other entities that provide factoring services, which buy accounts receivables at a discount.

There is no consolidated legal framework with specific provisions covering all aspects of this business, said a finance ministry official, justifying the new bill.

The move will help small businesses that find it difficult to get short-term credit and working capital loans.

The factoring business has not made much progress in India because of a lack of a consolidated framework for the business. In 2008, the total factoring business was worth Rs 33,228 crore, or just 1.24% of the total bank credit. Steep stamp duty on assignment of debt and lack of recourse for the buyer if the account receivable turns sour are the other factors troubling the business.

The new bill proposes to address both the concerns, removing the stamp duty on assignment of debt and amending the Civil Procedure Code, 1908 to extend the law relating to recovery of debt to dues under a factoring arrangement.

As of now only banks are exempt from paying stamp duty on receivables Rs Pure factoring companies have to pay the duty, which differs from state to state.

The legislation will also aid banks and factoring companies such as SBI Global Factors, India Factoring and Aditya Birla Finance in their expansion plans.

The amendment in the Stamp Act is necessary because it makes the transaction costlier by 1% annually. Such a relaxation would be beneficial to the industry as it will put us on a level playing field with the banks, said Devendra Umrao, vice-president and head relationship-north at India Factoring , a non banking finance company promoted by Punjab National Bank along with FIMBANK Group (Malta) and Banca IFIS (Italy).

The proposed bill will also require registration and regulation of factoring companies by the Reserve Bank of India .

This will straighten out the procedural challenges and also help in easing the reluctance of clients and customers as the assignment of debt will automatically enjoy legal standing, said Mr Umrao.

Under the new law assignment of receivable will be noted in a central registry, which is to be established soon.

As of now banks are reluctant to give a no-objection certificate to clients for transferring the charge on all receivables to the factoring companies.

If there is a data base, the banks will also know how much debt a company has raised from factoring firms, the finance ministry official said.