Skip to main content

Higher LTCG Tax for Those Betting on Mergers

By
LACUNAE Grandfathering benefit for taxes on longterm capital gains doesn’t cover mergers, demergers
Investors of at least two dozen companies, including Capital First, Ultra Tech Cement, Bharat Financial, will have to shell out higher capital gains tax. This is because the ‘grandfathering’ benefit for taxes on longterm capital gains — reintroduced in this year’s Union Budget — doesn’t cover mergers and demergers. Grandfathering refers to exemptions on the gains made prior to enactment of a new law from the ambit of the new law. The government said longterm capital gains tax will be calculated based on the Jan 31 trading price of a stock. However, this benefit applies only to stocks acquired or purchased before Jan 31, 2018. If the shares were non-existent or unlisted as on Jan 31 long-term capital gains tax would be calculated based on original cost of purchase.
In mergers, investors of the company getting acquired receive shares of the new company in exchange for their original shares. Such shares would be considered as acquired after Jan 31. As a result, long-term capital tax would be calculated based on original cost of acquisition. “In cases where a company merges with another company after February 1, 2018, grandfathering provisions do not apply and the taxpayers of amalgamating company will have to pay capital gains tax on entire gains computed with reference to original cost basis,” said Bhavin Shah, partner, PWC India.
For instance, consider the ongoing merger of IDFC Bank and Capital First. Assume a shareholder ‘A’ had purchased 10 shares of Capital First in 2011 and is still holding the stock. The companies have agreed to a swap ratio of 139:10. Hence, the shareholder ‘A’ will get 139 shares of IDFC Bank in exchange for his 10 Capital First shares. Since these 139 shares ‘A’ gets were created after Jan 31, the grandfathering benefit will not apply. Hence, when ‘A’ decides to sell his IDFC Bank shares in future, the cost of acquisition will be the price at which he purchased the shares back in 2011. The tax outgo would be at least 5-6 times higher in this case since Capital First shares have gained nearly 300% since 2011. Had there been a grandfathering exemption on these deals, ‘A’ would have to pay tax only on the gains made after January 31.
As per latest rules, selling of any stock held for less than a year will be subject to short-term capital gains tax while the ones held more than a year are subject to long-term capital gains tax. Short-term capital gains tax on stocks and equity mutual funds is charged at a rate of 15% while it is 10% for the long-term. The rules are different for the acquiring company. In the earlier scenario, if ‘A’ had purchased IDFC Bank shares in 2011 and sold them now, he wouldn’t be needed to pay tax on gains made before January 31.
The Economic Times,09th October 2018

Comments

Post a Comment

Popular posts from this blog

RBI deputy governor cautions fintech platform lenders on privacy concerns during loan recovery

By
  India's digital lending infrastructure has made the loan sanctioning system online. Yet, loan recovery still needs a “feet on the street” approach, Swaminathan J, deputy governor of the Reserve Bank of India, said at a media event on Tuesday, September 2, according to news agency ANI.According to the ANI report, the deputy governor flagged that fintech operators in the digital lending segment are giving out loans to customers with poor credit profiles and later using aggressive recovery tactics.“While loan sanctioning and disbursement have become increasingly digital, effective collection and recovery still require a 'feet on the street' and empathetic approach. Many fintech platforms operate on a business model that involves extending small-value loans to customers often with poor credit profiles,” Swaminathan J said.   Fintech platforms' business models The central bank deputy governor highlighted that many fintech platforms' business models involve providing sm
Post a Comment
Read more

Credit card spending growth declines on RBI gaze, stress build-up

By
  Credit card spends have further slowed down to 16.6 per cent in the current financial year (FY25), following the Reserve Bank of India’s tightening of unsecured lending norms and rising delinquencies, and increased stress in the portfolio.Typically, during the festival season (September–December), credit card spends peak as several credit card-issuing banks offer discounts and cashbacks on e-commerce and other platforms. This is a reversal of trend in the past three financial years stretching to FY21 due to RBI’s restrictions.In the previous financial year (FY24), credit card spends rose by 27.8 per cent, but were low compared to FY23 which surged by 47.5 per cent. In FY22, the spending increased 54.1 per cent, according to data compiled by Macquarie Research.ICICI Bank recorded 4.4 per cent gross credit losses in its FY24 credit card portfolio as against 3.2 per cent year-on-year. SBI Cards’ credit losses in the segment stood at 7.4 per cent in FY24 and 6.2 per cent in FY23, the rep
Post a Comment
Read more

India can't rely on wealthy to drive growth: Ex-RBI Dy Guv Viral Acharya

By
  India can’t rely on wealthy individuals to drive growth and expect the overall economy to improve, Viral Acharya, former deputy governor of the Reserve Bank of India (RBI) said on Monday.Acharya, who is the C V Starr Professor of Economics in the Department of Finance at New York University’s Stern School of Business (NYU-Stern), said after the Covid-19 pandemic, rural consumption and investments have weakened.We can’t be pumping our growth through the rich and expect that the economy as a whole will do better,” he said while speaking at an event organised by Elara Capital here.f there has to be a trickle-down, it should have actually happened by now,” Acharya said, adding that when the rich keep getting wealthier and wealthier, they have a savings problem.   “The bank account keeps getting bigger, hence they look for financial assets to invest in. India is closed, so our money can't go outside India that easily. So, it has to chase the limited financial assets in the country and
Post a Comment
Read more