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Off-market deals under scanner

Sebi asked to provide details of such transactions for finance ministry and tax department to study these and issue final guidelines on ‘anti-abuse’ measures
 
The finance ministry has sought an “exhaustive list” of wide-ranging off-market transactions from the Securities and Exchange Board of India, to decide whether  investors have to pay long-term capital gains (LTCG) tax under a new rule. The proposed clause in this year’s Budget says those who acquired shares in unlisted  companies after October 1, 2004, will have to pay LTCG if they hadn’t paid securities transaction tax (STT) at the time of purchase. At present, STT is not paid  when shares are acquired in off-market transactions such as mergers and acquisitions,qualified institutional placements or private equity investments in unlisted companies.
 
The ministry official and the tax department are working closely to finalise guidelines,to be issued after considering the concerns raised by market players,  said the Central Board of Direct Taxes (CBDT).
 
“Weare in touch with the capital market regulator.We had sought information about some of the categories of allotments / placements where checking can be done,”CBDT Chairman Sushil Chandra told
 
Business Standard .“As a large number of persons are involved, we need to examine if back-dated purchases have been done or someone is taking advantage of LTCG exemptions.
We are receiving a very exhaustive list from the regulator and,accordingly,we will come up with a clarification.” The central government has clarified that  transactions such as a rights or bonus issue or initial public offerings, foreign direct investments (FDI) where there is no incidence of STT would be exempt.
But, there is lack of clarity on various categories such as private placements,employee stock options and the shares a company acquired before it gets listed.
 
“There is no need to worry at all on the issue.We have brought this as an‘anti-abuse’ measures,” Chandra said. “This is not are venue raising avenue for us. This provision will be exempting all genuine cases of allotment of shares without payment of STT.So,if there is a person who got shares out of IPO/FPO or if it is  a genuine FDI coming via unlisted companies or bonus shares,these will not be covered.We are very clear on this.” On the rationale behind the new clause,Chandra said, “It has been noticed during search operations that the exemptions provided are being misused by certain persons for declaring their unaccounted income as exempt  LTCG by entering into sham transactions.In some cases, brokers were found misusing the LTCG exemption through off-market purchases. The new provision is for those  utilising their money and converting it through penny stocks and jacking up prices to a particular level and then using the exit route to convert their black  money into white.” Tax experts said the new provision could create confusion and there was no need for such clauses when the government would notify the General  Anti-Avoidance Rules for preventing companies from routing transactions through other countries and avoiding taxes.“Why does the government require the  new clause?It was set to evoke anti-avoidance tax rules from April 1,”said Sudhir Kapadia, partner and national tax leader,EY India.“The adoption of anti-abuse  rules in tax treaties helps target shell companies or holding companies,incorporated overseas to evade taxes by showing the irresidency as a tax haven,  though the management and effective decision-making takes place in India.” The market regulator’s surveillance mechanis mis strong.Stock exchange systems  raise an alarm in case of price manipulation,he said. “The new clause and the related exemptions would only create confusion among market participants.This  has to be only for penny stocks, created with the intent of evading long-term capital gains tax,”he added.
 
06TH FEBRUARY,2017, BUSINESS STANDARD, NEW-DELHI
 

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