Draft Rules Framed on Capital Gains Tax Where STT Not Paid
Bonus shares, policy compliant foreign investment eligible for 10% tax even though STT not paid
The income tax department has put out draft rules specifying situations where the recently imposed capital gains tax would apply even though no securities transactions tax (STT) has been paid.
Bonus shares, policy compliant foreign investment, shares acquired via a will or inheritance, court or regulator approved acquisition, shares acquired under insolvency resolution and those under government disinvestment among others would be eligible for the new capital gains tax regime even though STT is not paid.
The department has sought comments on the draft rules that recognise genuine transactions where STT could not have been paid.Once these rules are in force, these transactions would be eligible for tax at the rate of 10% even though there is no STT paid. Otherwise, such gains can face higher tax if clubbed with income. The circular lists three cases that will not enjoy the 10% capital gains if STT is not paid, leaving all other cases to be eligible.
The three instances not eligible are, preference issue of shares in a company not frequently traded on stock exchanges, transactions in a listed company not entered through stock exchanges, and shares acquired after delisting but before relisting. “There can be various genuine cases where STT could not have been paid,” said Garima Pande, business tax services leader at EY India. “The move to seek comments/ suggestions from industry stakeholders is a welcome step to ensure wider coverage of such genuine cases,” she said.
The rules would come into effect from April 1, 2019 and accordingly apply to assessment year 2019-20 and subsequent assessment years. In all the three ineligible cases, the rule provides for exemptions to enjoy the 10% capital gains tax. Preference shares acquired following approval by market watchdog Sebi, Supreme Court, bankruptcy court NCLT or Reserve Bank of India, those acquired by non-residents under foreign investment guidelines, those acquired by an eligible investment fund or qualified institutional buyer, and those acquired under certain Sebi regulations will enjoy the 10% tax.
Similar benefits are available in case of off-market share purchases such as those acquired from government, acquisition by banks or asset reconstruction companies, employee stock option, under Sebi’s acquisition code. “It covers the same scenarios as were notified in 2017 in the context of shares acquired after 2004. To that extent, the draft is on expected lines and covers most genuine transactions,” said Abhishek Goenka, leader of corporate and international tax at PwC.
The Finance Act, 2018 has withdrawn the long-term capital gains tax exemption on equities and equity-oriented mutual funds and introduced a new section 112A to tax such gains.The section taxes capital gains arising from transfer of a longterm capital assets such as equity share in a company, or a unit of an equity oriented fund, or a unit of a business trust, at 10%.
Capital gain up to ?1 lakh in a year is exempt. It, however, provides that such tax will apply to capital gains arising from transfer of long-term capital asset, if it is equity share in a company, only if STT has been paid on acquisition and transfer of such capital asset. This excludes many cases where shares are acquired but no STT is levied
The Economic Times, New Delhi, 25th April 2018
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