In a big relief to private equity and venture capital firms who prefer buying convertible preference share, the government has exempted conversion of preference shares into equity from capital gain tax. Earlier, the conversion of preference shares into equity was considered a transfer and thus attracted capital gains tax.
Most of the private equity firms prefer to make investments in the form of convertible preference shares. Earlier, there was a doubt if conversion of preference shares into equity was going to be taxed or not.
IVCA Chairman Rajat Tandon said that VC/PEs often invest through cumulative convertible preference shares (CCPS). Now, CCPS, when converted, will be completely tax efficient and indexed from the date of issue and not from the date of conversion for long-term capital gain purposes.
“In order to provide tax neutrality to the conversion of preference share of a company into equity share of that company, it is proposed to amend section 47 to provide that the conversion of preference share of a company into its equity share shall not be regarded as transfer,” said the memorandum to the Finance Bill 2017.
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The move is aimed at boosting investments in startups.
Under the existing provisions of the Act, conversion of security from one form to another is regarded as transfer for the purpose of levy of capital gains tax. However, tax neutrality to the conversion of bond or debenture of a company to share or debenture of that company is provided under the section 47.