Long-term capital gains: Draft notification ambiguous

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Mumbai | Published: April 6, 2017 5:13:43 AM

While the government on Monday came out with the much-awaited clarification on the anti-abuse measures in the Finance Bill, 2017, vis-à-vis long-term capital gains (LTCG) tax exemption, the draft notification is pretty ambiguous and does little to address investor concerns.

In what experts call a very avoidable situation, the government has come out with a ‘draft’ and sought views on an amendment that has already come into effect from April 1.

While the government on Monday came out with the much-awaited clarification on the anti-abuse measures in the Finance Bill, 2017, vis-à-vis long-term capital gains (LTCG) tax exemption, the draft notification is pretty ambiguous and does little to address investor concerns.

Firstly, in what experts call a very avoidable situation, the government has come out with a ‘draft’ and sought views on an amendment that has already come into effect from April 1. So, between April 1 and the date when the final notification will be released, investors wouldn’t know whether their acquisition of shares would fall within the government’s definition of ‘genuine transactions’ and hence whether or not their gains would attract LTCG tax.

“Decisions in capital markets need to be taken real time and the delay in finalisation of the notification plus lack of clarity is leading to uncertainty for investors wanting to exit their positions as well as other intermediaries in the financial markets ecosystem,” said Tejas Desai, Partner, Ernst & Young LLP.

Secondly, one of the three categories of transactions that will now attract LTCG, as per the draft notification, include instances “where transaction for purchase of listed equity share in a company is not entered through a recognised stock exchange”. This broad definition virtually includes all off-market transactions and nullifies the government’s clarification that genuine cases, wherein STT couldn’t have been paid at the time of acquisition, would continue to be exempted from LTCG tax.

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“The open wordings of the second clause of the draft notification may have wider ramifications. On a literal reading, it could encompass both primary as well as secondary transactions, including genuine transactions such as purchase of shares under ESOP, fresh fund raise by listed companies from promoters or financial investors during downturn, genuine off-market purchases such share acquisitions where price also include control premium, off-market purchase-sale within family either from the perspective of family arrangement or securing funds, off-market purchase-sale between promoter and strategic/financial investors, etc,” said Ravi Mehta, Partner, Grant Thornton India.

Desai too added that the clause in the draft notification about listed shares not purchased through the stock exchange, requires additional clarity so that the intent of the government that genuine cases are protected is fully achieved.

In order to prevent misuse via ‘sham transactions’, the government had, in the Finance Bill, proposed to amend the Income Tax act to allow LTCG exemption only when securities transaction tax (STT) had been paid.

This had led to fears that even genuine financial transactions like fresh issuance of shares or shares acquired in an unlisted company but sold after it is listed, even when held for more than 12 months, would attract LTCG tax.

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