Promoters and private equity (PE) investors who failed to pay capital gains tax when they sold their shares via the offer for sale (OFS) in initial public offerings (IPOs) will have to cough up the amount following an amendment to tax laws in the FY25 Budget.
Taxpayers, in some cases, were not paying capital gains tax citing the absence of an express provision to determine the fair market value (FMV) of the equity shares since these were originally unlisted, although securities transaction tax (STT) had been paid on them. The new rules come into effect retrospectively from February 18, 2018. As such, all sales post this date will come under the ambit of the changed provisions.
Revenue secretary Sanjay Malhotra told FE the government was yet to fully estimate the quantum of tax that could be recovered. “We are yet to work that out but we needed to plug this gap,” Malhotra said.
As Vivek Gupta, partner, Deloitte India, observed that many promoters were taking a view they were not liable to pay any capital gains tax because the fair market value was indeterminable. “However, this point has not been clarified by the tax authorities who have made it abundantly clear that capital gains tax is payable,” he said.
The amended provisions of the Income Tax Act, 1961, define what fair market value means, leaving no ambiguity on the matter. FMV means an amount which bears to the cost of acquisition, the same proportion as the Cost Inflation Index for 2017-18 bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year starting April 1, 2001, whichever is later.
The amendment has been made to Section 55 of the Income Tax Act, with the sub clause (iii) of clause (a) of the Explanation to clause (ac) of sub section (2) of section 55 of the Act.