IT Dept notifies new rules for capital gains tax exemption

Tunia Cherian | | Updated on: Jan 12, 2018


‘Genuine’ transactions such as FDI, venture funding, ESOPs will continue to be off tax net

The Income Tax Department on Tuesday notified rules specifying equity transactions that will attract capital gains tax if securities transaction tax (STT) was not paid on them.

The move comes after the Finance Act 2017 that aimed to curb the practice of declaring unaccounted income as exempt long-term capital gain by entering into sham transactions.

According to the notification that follows draft rules issued in April this year, the Central Board of Direct Taxes (CBDT) has specified transactions where payment of STT would be mandatory to get the benefit of exemption from capital gains tax. These include acquiring existing listed equity shares through a preferential issue in a company whose shares are not frequently traded, transactions off the stock exchange, and acquisition during the delisting period of the company.

“This notification shall come into force with effect from April 1, 2018, and shall accordingly apply to assessment year 2018-19 and subsequent assessment years,” said the CBDT.

However, other genuine transaction, such as acquisition of equity shares by venture capital or investment funds, employee stock options, foreign direct investments by non-resident Indians and off-market transactions in schemes approved by the Supreme Court, high court, National Company Law Tribunal, SEBI and RBI, continue to be exempt.

Further, acquisitions through preferential issues such as conversion of loan to equity, allotment to financial institutions pursuant to a debt restructuring scheme, acquisitions by banks and securitisation companies and also by modes such as gifts, holding subsidiaries, mergers and conversions would also be exempt from the new rules.

“To protect the interest of genuine investors, exceptions are also provided in the specified transactions,” the Finance Ministry said in a statement.

The Finance Act, 2017 amended the provisions of Section 10 (38) of the Income-Tax Act to provide exemption from long-term capital gains tax for income from transfer of equity share acquired on or after October 1, 2004, provided that the transaction had been charged for STT. All stock market transactions attract STT in the range of 0.017 per cent to 0.125 per cent.

Addressing concerns Tax experts said the final notification had taken care of many concerns that were raised after the draft rules were issued.

“It specifically outlines bona fide off-market transactions that will not be hit by the withdrawal of long-term capital gains exemption… It should not have an adverse impact on genuine M&A transactions and transfer of shares for succession planning purposes,” said Radhika Jain, Director, Grant Thornton Advisory.

“The exemption has been extended to transactions like gifts, holding subsidiary transactions and other forms of corporate reorganisations if the original allottee of the equity shares had acquired them in a manner compliant with this final notification,” said Amit Agarwal, Partner, Nangia & Co, while noting that the final notification does not address the acquisition of equity shares in private arrangements, which may also been entered into at market prices.

Published on June 06, 2017
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