The government has exempted genuine equity investments through IPOs, bonus or rights issues by a listed company from long-term capital gains tax even if no securities transaction tax (STT) was paid on the transfers. It has also exempted holding-subsidiary transactions or transactions involving mergers/demergers, equity investments made by a non-resident under FDI regulations, employee stock options or gifts in the form of shares from long term capital gains tax. An amendment to Section 10(38) of the I-T Act was brought in after the tax department noticed that shell companies were being created by entering into sham transactions and unaccounted income was being routed into these companies to avail long-term capital gains benefits. The amendment provides that capital gains exemptions for income arising from the transfer of shares acquired on or after October 1, 2004, will be available only if the acquisition was chargeable to STT. The Income Tax department has now notified three types of transactions where the provision will apply, while sparing genuine ones. The first is where an acquisition of a listed equity share, which is not frequently traded in a recognised stock exchange, takes place through preferential issue. The second, those acquisitions where the listed scrip is not purchased over a recognised stock exchange. And third is the acquisition during the delisting period of the company.
For each of the three categories, payment of STT will be mandatory to avail benefit of capital gain exemptions. The notification provides that capital gains exemption shall be available in case of share acquisition (without STT) made by non-residents/venture capital funds under the specified situations, for share acquisition made under ESOP or approved M&A schemes and the SEBI guidelines. It also extends the relief to share acquisition which has been approved by the Supreme Court, High Court, National Company Law Tribunal, Securities and Exchange Board of India or Reserve Bank of India. “The notification is a big relief for investors and shall re-instate their confidence that the Indian tax system is becoming taxpayer friendly and is prompt in bringing tax certainty to avoid unwarranted litigation. This notification is applicable from April 1, 2018 and shall accordingly apply to AY 2018-19,” Nangia & Co Managing Partner Rakesh Nangia said.
The tax department had in April come out with a draft notification specifying certain eligible transactions for capital gains tax exemption on which STT was not paid and sought public comments. Tax experts, however, said that the final notification does not address the acquisition of equity shares in private arrangements, which would mean that inter-se transfer of equity shares between promoter group companies will not enjoy the exemption. The transfer of equity shares under pledge arrangements (outside stock exchange) shall not be given the benefit of exemption to the buyer. Similarly, private family deals at fair values will also not enjoy the benefit of exemption under 10(38). Also the final notification does not afford protection to issuance of equity shares under sweat equity plan, which are quite prevalent these days. Similarly, the acquisition of equity shares under settlement of debt by any private company, will not enjoy the exemption.