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I wish to bring to your notice a lacuna in the Income-tax Act, 1961 that causes unintended hardship to the tax payers. This lacuna relates to taxation of long-term capital gains arising on transfer of equity shares pursuant to delisting of equity shares from the stock exchange.

At present long-term capital gains arising out of transfer of equity shares of a company listed on stock exchange is exempt provided the securities transaction tax (STT) is paid on the transfer.

There are several instances where companies (for example Cadbury India Ltd, Wartsila, Sandvik Asia, Yokogawa, Eicher Ltd, Syngenta Ltd, Philips India Ltd) get their shares delisted by offering exit route to the shareholders. In these cases, the promoters buy equity shares of listed company from the shareholders by following the procedure prescribed by SEBI for this purpose.

In this case, the transfer of shares of erstwhile listed company is not done on the stock exchange, and therefore the transaction does not attract STT and the long-term capital gains arising on such transfer is not exempt.

This is a lacuna because if such equity shares are transferred just before the delisting at the stock exchange, such transaction is tax-free. Whereas, if the same equity shares are transferred to the promoters directly by complying with the delisting guidelines of SEBI, the transaction is not tax-free even though full procedure of SEBI is followed. Moreover, the shareholders are helpless because they will have to tender the shares for buy-back for delisting; else they will be holding illiquid security.

It is my sincere suggestion that this lacuna needs to be corrected. I suggest that the STT be charged to both the promoters (i.e. transferee) buying the shares and to the transferor. The transferee could deduct the transferor’s STT at the time of payment of sale proceeds. It is this simple.

Pruthul S Patel, ACA, CPA,

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