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Ambiguities remain

Anand Kalyanaraman | Updated on August 19, 2018 Published on August 19, 2018

Under the new tax regime, there is lack of clarity on what should be considered as the cost of acquisition in some other special cases such as mergers/amalgamations, demergers, gifts/ inheritance/will, and stock splits/consolidations, when these shares are sold.

Will the formula laid down by Budget 2018 apply in these cases too or will the original cost of acquisition, as laid down by various other sections of the tax law, continue to be applicable? Shareholders would prefer the formula laid out in Budget 2018 to be applied in these special situations too as that would exempt from tax the LTCG up to January 31, 2018 on the sale of these shares. But the matter seems open to interpretation.

Amit Agarwal, Partner, Nangia Advisors LLP says, “There are several ambiguities with respect to the methodology of calculating taxable long-term capital gains, especially in the context of tax-neutral corporate actions.”

Let’s consider a case of amalgamation in which company A is merged into company B. The shareholders of company A will receive shares of company B. The tax law provides that for the investor now holding shares in company B, the cost of acquisition will be the cost that was originally paid to acquire shares in company A. Now, when the shares of company B are sold, the law does not give the flexibility to use the cost of acquisition formula laid out by Budget 2018. If the original cost of acquisition is used to compute LTCG, the tax incidence could be higher than if the January 31, 2018 price were to be used as the cost of acquisition.

In a demerger, shareholders of the demerged company receive shares of the resulting company too, and the cost of acquisition is apportioned on the basis of net book value of the entities. But the law does not provide for the split of the cost of acquisition of these companies arrived at using the Budget 2018 formula.

In a transfer by inheritance/gift/will, the law says that cost of acquisition to the new owner will be the cost to the previous owner. On sale by the new owner, there is scope for ambiguity because the law currently does not provide the flexibility of using the Budget 2018 formula to arrive at the cost of the acquisition.

In the case of stock splits/consolidations after January 31, 2018, on the sale of these new securities, the tax authorities could possibly deny the benefit of the cost of acquisition using the Budget 2018 formula.

Published on August 19, 2018

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