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ESOPs, M&As out of capital gains tax net


The Central Board of Direct Taxes (CBDT) has provided relief for genuine transactions through which shares were acquired without paying the securities transaction tax (STT).

According to final regulations released on Tuesday, the board provided exemptions for employee stock options (ESOPs) and duly approved mergers and acquisitions (M&As). It also kept shares acquired under the foreign direct investment (FDI) policy out of the ambit of rules on curbing tax evasion through investments in penny stocks.

The tax authority also exempted institutional investors and scheduled banks.The exemption is only for institutions registered as qualified institutional buyers with the Securities and Exchange Board of India (Sebi).

The exemption to banks is aimed at keeping shares acquired through debtequity conversion underaloan restructuring out of the purview of the rules.Only three scenarios will attract capital gains if shares were acquired without paying the STT. The first scenario is when listed shares are acquired through preferential allotment in companies that are not traded frequently on stock exchanges.

Typically, these are penny stocks.The tax department is investigating several cases where unaccounted money was used for sham transactions in penny stocks to claim capital gains tax exemption.

Through these regulations, the tax authorities have tightened several loop holes in the capital gains tax regime.“The final guidelines are exhaustive yet simple.They have dispelled every genuine concern.

At the same time, the government has cracked the whip on investors who use the longterm capital gains tax exemption to reroute unaccounted money,” said Girish Vanvari, partner and national head of tax, KPMG.

The second scenario in which longterm capital gains tax will be applicable is where shares have been acquired outside the stock exchange platform.The third scenario is when an investor buys shares just afterafirm is delisted and sells once it relists.

Tax experts said the regulations had provided an exhaustive list of exemptions based on feedback received and these would address all investor concerns.

The notification has not adversely altered the longterm capital gains provision for sale of listed shares, which is an important tax incentive for the securities markets,” said Amit Singhania, partner, Shardul Amarchand Mangaldas.

However, the final regulations have also left out few types of transactions from the exemption list. These include issue of shares against warrants, interse transfer of shares between promoters, strategic acquisitions by private investors.

Further, the institutions which are not recognised by Sebi as QIBs will also not get any exemptions.Such institutions include Category III alternate investment funds, investments made by portfolio management services and broadbased funds.

The Union Budget 201718 had proposed introduction of antiabuse provisions and had said the longterm capital gains tax exemption on transfer of shares acquired on or after October 1, 2004, would be available only if the STT was paid at the time of acquisition.

However, this move would not have allowed the exemption in several genuine cases where the STT could not have been paid.Subsequently, the CBDT sought opinion from
stakeholders and issued the notification today.

The proposed changes will be added to Section 10(38) of the Income Tax Act and will come into effect from April 1, 2017. The regulations will only apply to share purchases after October 1, 2004.

Business Standard New Delhi, 07th June 2017

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