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7
June 2017
India
on Tuesday amended its income lax law to exempt genuine equity investments
through initial public offerings (IPOs), bonus or rights issues by a listed
company from long-term capital gains tax even if no securities transaction tax
(STT) was paid.
The
amendment provides that "the condition of chargeability to STT shall not
apply to all transactions of acquisitions of equity shares entered into on or
after the first day of October 2004," a Union Finance Ministry release
said here, notifying three types of transactions where the provision shall
apply. The Total Investment & Insurance
Solutions
The
three transactions attracting the provision are "acquisition of listed
shares in preferential issues of a company whose shares are not frequently
traded in a recognised stock exchange, acquisition of existing listed equity
shares in a company not through a recognised stock exchange of India and
acquisition of shares of a company during the period of its delisting," it
said.
For
these three categories, payment of STT will be mandatory to avail benefit of
capital gain exemptions. The Total Investment
& Insurance Solutions
The
amendment has been introduced after the Income Tax Department detected that
shell companies were being created by entering into fake transactions, and
unaccounted income was being routed into these firms to avail long-term capital
gains benefit. It has been designed to spare genuine transactions. The Total Investment & Insurance Solutions
"In
order to curb the practice of declaring unaccounted income as exempt long-term
capital gain by entering into sham transactions, the Finance Act, 2017 amended
the provisions of Section 10 (38) of the Act to provide that exemption under
this section for income arising on transfer of equity share acquired or on
after 1st day of October, 2004 shall be available only if the acquisition of
share is chargeable to STT," the ministry said.
"However,
to protect the exemption for genuine cases where the STT could not have been
paid, it was also provided that the central government shall notify the
acquisition for which the condition of chargeability to STT shall not
apply," it added.
The
amendment also exempts holding-subsidiary transactions, or those involving
mergers and demergers, equity investments made by a non-resident Indian under
foreign direct investment (FDI) regulations and employee stock options or gifts
in the form of shares from long-term capital gains tax. The Total Investment & Insurance Solutions
It
provides that capital gains exemption will be available in case of share
acquisition (without STT) made by non-residents and venture capital funds under
the specified situations, for share acquisition made under employee stock
ownership plan (ESOP) or approved M&A schemes and the Securities and
Exchange Board of India (SEBI) guidelines.
It
also extends relief to share acquisition, which has been approved by the
Supreme Court, high court, National Company Law Tribunal, Securities and
Exchange Board of India (SEBI) or Reserve Bank of India (RBI). The Total Investment & Insurance Solutions
Commenting
on the development, Abhishek Goenka, Partner and Leader Direct Tax, PwC said:
"The notification comes as a breather for foreign investors and venture
capital houses as well as shareholders, who have acquired shares upon corporate
restructuring undertaken vide court approved schemes on which no STT was
paid."
"The
government has now provided a final list of transactions on which long-term
capital gains tax shall be exempt in spite of STT not having been paid at the
time of acquisition. Effectively, the notification covers 'all transactions'
barring three specified transactions," Goenka said in a statement here. The Total Investment & Insurance Solutions
The
government has now carved out exceptions with respect to court-approved
schemes, FDIs and investments made by a venture capital company. "The
notification clearly intends to allow genuine transactions on the benefit
arising from Section 10(38) without making any exceptions," he
added. The Total Investment & Insurance
Solutions
A
crucial aspect of the notification is granting of exemptions to tax-payers, who
have received shares in the course of employment (ESOP). The government has
specifically excluded ESOPs from being taxed, even though no STT may have been
paid at the time of acquisition.
"Framing
laws that tackle abuse is always very difficult to balance with ease of doing
business. This government's and the Department of Revenue's approach of open,
rational and balanced dialogue with Industry has been evident from its
start," Indian Private Equity and Venture Capital Association (IVCA)
Chairman Gopal Srinivasan said.
"This
is a wonderful example of ease of doing business, as it is in an area where
tough laws and ease of investing are now in harmony in this remarkable new
anti-abuse taxation rule, for lightly-traded listed company shares," he
added. The Total Investment & Insurance
Solutions
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