The Income Tax Department has notified norms for applicability of concessional long-term capital gain tax. This will benefit investments made in initial public offerings (IPOs) and follow-on public offerings (FPOs).
The new norms will come into effect from April 1, 2019, and will apply in relation to assessment year 2019-20 and subsequent assessment years. The notification talks about two types of transactions: First, those entered into before October 1, 2004, and second, those entered into on or after October 1, 2004, and not chargeable to securities transaction tax (STT).
Long-term capital gain means gain made after one year from the date of purchase. Finance Act 2018 made long-term capital gain (LTCG) arising on the sale of equity shares, unit of equity-oriented fund or a unit of business trusts chargeable at a concessional rate of 10 per cent subject to the conditional payment of STT. However, the provisions provided that the aforesaid condition of payment of STT will not apply to the transactions which may be notified by the central government in this regard.
Final notification
This April, the Central Board of Direct Taxes (CBDT), issued a draft notification to provide exemption from the condition of payment of STT on all transactions of acquisition of equity share except for specified list of acquisitions mentioned therein entered on or after October 1, 2004. Now, the board has issued the final notification providing the class of transactions to which the benefit of concessional rate of LTCG tax shall be available even if STT was not paid on such transactions. There is a positive list as well as a negative list.
Positive list means those that will attract the concessional rate. These include IPOs, FPOs, bonus or rights issues by a listed company, acquisition approved by court/NCLT/SEBI/RBI, acquisition pursuant to exercise of Employees Stock Option Scheme (ESOP), etc, for which concessional 10 per cent tax on LTCG will continue to apply. The off-market transactions undertaken by non-residents in line with FDI guidelines, qualified institutional buyers, venture capital players without payment of STT have found relief in the recent notification.
The negative list includes the specified list of acquisition of shares which are not eligible for concessional 10 per cent tax on LTCG. These are acquisitions of existing listed equity shares of companies that are not frequently traded on recognised stock exchanges (RSE) made through preferential issue except in specified cases; acquisition of existing listed equity shares of a company not done through RSEs of India except in certain specified cases; and acquisition of equity shares of a company between the period from the date of delisting of the company from the RSE to the preceding date it was listed again on the RSE.
Rakesh Nangia, Managing Partner at Nangia Advisors, said clarification was needed with respect to the taxability of the newly introduced LTCG on equity shares, since unintended hardships may have been experienced in certain specific cases.
However, he said, there were situations where the concessional rate of 10 per cent tax on LTCG will be denied in respect of shares acquired during the intervening period — the period of delisting of the company and the day prior to its relisting.