The Central Board of Direct Taxes (CBDT) has notified transactions for which the condition of chargeability to securities transaction tax (STT) for claiming exemption u/s 10(38) of the Income-Tax Act, 1961 shall not apply. With this it has put an end to uncertainties that arose from the Budget proposal relating to such transactions.
“The Budget 2017 had proposed to tax Long Term Capital Gain on equity share transactions if those shares were not subjected to STT at the time of acquisition. The intention of the government behind this amendment was to tax only a few sham transactions undertaken with an intention to avoid taxes. But this amendment has raised many questions on the taxability of listed shares acquired under ESOP/ESPP, Bonus issue, IPO, follow-up offer, etc where the acquirer does not pay STT on acquisition of shares,” says Chetan Chandak, Head of Tax Research, H&R Block India.
Under the amended provision, the government had the power to notify certain mode of acquisition which will continue the LTCG exemption even if it was not subject to STT at the time of acquisition (viz. Bonus issue, IPO, follow-up offer, etc). In this regard, the government has already issued a draft notification in the past and it was expected that the government will soon come with a final notification to prescribe a list transactions in which cases the exemption will continue as it was available before this amendment.
The final notification provides that the condition of chargeability to STT shall not apply to all transactions of acquisitions of equity shares entered into on or after the first day of October, 2004, other than the three ‘specified’ transactions’ (which are on the similar lines as the draft notification released in April for public comments).
The final notification further provides that capital gains exemption u/s 13(38) shall be available in case of:
1. Share acquisition (without STT) made by non-residents / venture capital funds under the specified situations,
2. Share acquisition made under ESOP or approved M&A schemes and the SEBI guidelines;
3. Share acquisition which has been approved by the Supreme Court, High Court, National Company Law Tribunal, the Securities and Exchange Board of India or the Reserve Bank of India
“It is a big relief for many taxpayers who have invested in listed equity shares in the past through a mode which was not subject to STT and to the salaried individuals who are holding listed shares received under sweat equity scheme,” said Chandak.