Waiver even if no securities transaction tax was paid on the transfers
The Central Board of Direct Taxes (CBDT) on Tuesday exempted genuine equity investments through IPOs, bonus or rights issues by a listed company from long-term capital gains (LTCG) tax even if no securities transaction tax (STT) was paid on the transfers. It has also exempted holding-subsidiary transactions or deals involving mergers/demergers, equity investments made by a non-resident under FDI regulations, employee stock options or gifts in the form of shares from LTCG. Earlier this year, an amendment to the Finance Act, 2017 said that equity transactions are exempt from LTCG tax only if the sale took place after October 1, 2004 and if STT was paid on it. The government justified the amendment on the grounds that the LTCG tax waiver was being misused: Sham transactions were used to declare unaccounted income as exempt from long-term capital gains. Since this amendment would have also denied LTCG tax waiver benefit to genuine transactions like FPOs, IPOs, bonus or rights issued by a listed company — although such denial was not the intent — the board has now listed the transactions that will be eligible for LTCG tax exemption despite not having paid STT. While tax on capital gains from such genuine equity investments held for one year or more is zero, if the security us held for less than a year, a short-term capital gains tax of 15% is levied. Currently, the STT, a turnover tax, is levied on stock market transactions in the range of 0.017-0.125%. “The (CBDT’s final) 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. According to Abhishek Goenka, partner and leader-direct tax, PwC, “This notification comes as a breather for foreign investors and venture capital houses as well as shareholders who have acquired shares upon corporate restructuring undertaken vide court-approved schemes on which no STT was paid.”
The notification clearly intends to allow genuine transactions the benefit arising from Section 10(38) without making any exceptions. Some 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. Specific equity transactions like acquisition of share in a company whose equity shares are not frequently traded in a recognised stock exchange and where transaction is not through a stock exchange and those acquisition made during the de-listing period of the company are not exempted. According to Nangia, the CBDT notification doesn’t exempt issuance of equity shares under sweat equity plan and acquisition of equity shares under settlement of debt by any private company.