I own equity shares of a company outside India, listed and traded on the stock exchange of that foreign country. As a “resident individual” I disclose details of this asset under schedule FA in my income tax submissions. The company has initiated a share repurchase programme (FY2022-23 India taxation year) in accordance with rules applicable to listed companies in that geography. If I offer my shares for repurchase under the programme, what is the tax treatment of such income (both short and long-term capital gain) in India? What are the schedules (including sub-items) in the ITR-2 form to be used for such disclosure? What are the support documents required to be produced in case I receive a notice for scrutiny of this transaction post-filing?
Generally, any profits arising from buyback of shares by the company would be taxed as capital gains for the shareholder.
The foreign shares referred to in the question are not listed in India and hence they would be considered as unlisted shares for the purposes of capital gains tax computations.
If you have held these shares for over 24 months before the date of sale, then it will qualify as a long-term capital asset and gains/loss (if any) would be regarded as long-term capital gains (LTCG) or long-term capital loss. If not, it will be regarded as short-term capital asset and gains/loss (if any) will be regarded as short-term capital gains (STCG) or loss.
LTCG is taxable at a special rate of 20 per cent (surcharge capped at 15 per cent and cess at 4 per cent on tax plus surcharge). On the other hand, STCG will be taxable at the applicable slab rates. While computing LTCG, the cost of acquisition of these shares can be indexed based on the prescribed cost inflation index. However, the benefit of indexation is not available in case of STCG. Expenses incurred during transfer can be claimed as a deduction in both cases.
Capital gains transaction has to be reported in the tax return under the following schedules:
·Schedule Capital Gains — “From sale of assets other than all the above listed items” and Amount of Short Term/Long Term Capital Gains included in the above items but not chargeable to tax in India as per DTAA — if any portion of the capital gain is claimed exempt. If exemption to be claimed as per DTAA, section “4. Income not chargeable to tax as per DTAA” to be filled under “Schedule EI”
· Schedule Foreign Assets — for shares held and any incomes received from them during the year
· Schedule EI — if any portion of the capital gains is claimed exempt from tax
· Schedule AL — to report any shares held as on March 31, 2023, for FY 2022-23
While there are no specified documents that are required for scrutiny, considering the nature of transaction, the following may be called for by the assessing officer:
· Bank statements (bank accounts in India/outside India) containing the sale/purchase proceeds details;
· Transfer or buyback documents relating to repurchase programme-related communications and supporting documents received from company;
· Calculation of capital gains
· Overseas tax return, proof for payment of taxes overseas, etc.
Please note that in case you pay taxation in the foreign country on this transaction, then, being a resident of India, you could claim foreign tax credit either as per section 91 or as per the double taxation avoidance agreement.
The writer is Partner, Deloitte India