Johnson Cherian.
The Central Board of Direct Taxes (CBDT) has come out with a final notification specifying the securities transactions that would attract capital gains tax where the securities transaction tax (STT) hasn’t been paid.
An amendment has been made in the Finance Act 2017 to curb the declaration of unaccounted income as exempt long-term capital gains under the previous provisions of the Income Tax Act by entering into fake transactions. The amendment notification specifies the transactions on which the tax would apply and and those on which tax would be exempt.
According to the notification, the chargeability to STT provision will not apply to all transactions of acquisitions of equity shares entered into on or after October 1, 2004, except the acquisition of listed shares in a preferential issue of a company whose shares are not frequently traded in a recognised stock exchange, the acquisition of existing listed equity shares in a company not through a recognised stock exchange of India, and the acquisition of shares of a company while it is de-listed.
Representation for relief
“The CBDT has accepted various representations made by the stakeholders to provide relief to certain transactions from the condition of STT,” Girish Vanvari, National Head of Tax, KPMG in India, said. Accordingly, certain acquisitions like acquisition by way issue of shares by a company, acquisition under employee stock option scheme or employee stock purchase scheme, acquisition by any non-resident in accordance with foreign direct investment guidelines of the Government of India acquisition by an investment fund or a venture capital fund or a qualified institutional buyer, acquisition by mode of specified transfer which are exempt (Section 47) and transfer by way of slump sale etc. have been exempted.
“Section 10(38) of the Income-tax Act, 1961, prior to its amendment by the Finance Act, 2017 provided that the income arising by way of a transfer of long-term capital asset, being equity share in a company, shall be exempt from tax if such a transfer is undertaken after October 1, 2004 and chargeable to Securities Transaction Tax,” said a government statement. “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 statement added.
However, it was noted that this would also apply to genuine cases where the STT could not have been paid, and so the government sought to define the transactions that would attract tax and which would not.
“This 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,” Abhishek Goenka, Partner and Leader Direct Tax, PwC India, said. “The notification clearly intends to allow genuine transactions the benefit arising from section 10(38) without making any exceptions.
