Impact of Finance Act 2014 on sale of unlisted securities

Aug 12 2014, 02:50 IST
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SummaryHave you been dealing in unlisted securities or entering into off-market transactions?

Have you been dealing in unlisted securities or entering into off-market transactions? If yes, you may want to consider the tax impact that Finance Act 2014 may have on the gains that you would incur on sale of such securities.

As per existing tax laws, a capital asset may either be a short-term capital asset (STCA) or long-term capital asset (LTCA), depending on the period of holding. Gains from alienation thereof would be short-term capital gains (STCG) or long-term capital gains (LTCG), as the case may be.

Shares held in unlisted companies were earlier classified as LTCA if held for more than 12 months and were eligible for a concessional rate of tax at 20%. However, as per Finance Act 2014, these shares would now qualify as LTCA only if they are sold after 36 months instead of 12 months, which means that shares held for more than 12 months but less that 36 months would now qualify as STCA. The gain arising on such sale of securities would be taxed at progressive rates of tax as applicable, instead of the beneficial rate of 20%.

Also, many companies award shares to their employees under various employee stock incentive plans to motivate and retain them. Generally, under such schemes, shares of foreign parent companies that are not listed on stock exchanges in India are offered as incentives.

When such unlisted shares are subsequently sold by employees, they would also be impacted by the above change as capital gains will be taxed at progressive rate instead of beneficial rate of 20%, if sold before 36 months and after 12 months. Moreover, this may affect the assignment costs for employers, especially where the employee is tax-equalised on personal income, which may include capital gains.

There are several private equity firms that have been investing in unlisted companies in India. Although such investors would generally have a longer holding period than just three years in respect of Indian investments, there may be exit opportunities in a shorter span of time, in which case tax burden may be higher. The only relief provided in the Finance Act 2014 is that this change would be effective only for shares sold after July 10, 2014.

Therefore, it would be wise to plan your exit timings in line with this change. Companies may also want to communicate this to their employees so that they take informed decisions regarding sale of shares allotted

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