May 01, 2018

TaxBuzz : Extension of preferential rate of tax on LTCG on Non-STT paid acquisition of equity shares

• Finance Act, 2018 had withdrawn exemption from tax of long term capital gains available on sale of interalia equity shares through stock exchange on payment of Securities Transaction Tax (‘STT’) under section 10(38) of the Income Tax Act (“the Act”) and introduced new section 112A, prescribing 10 per cent preferential rate of tax on such gains.
• Section 112A, however, provides that the aforesaid preferential rate of 10% tax shall apply to long term capital gains arising from sale of equity shares, only if STT was also paid at the time of acquisition thereof. Sub-section (4) of section 112A empowers the Central Government (‘CG’) to specify, by notification, acquisitions on which the aforesaid condition of payment of STT at the time of acquisition shall not apply.
• In exercise of powers conferred above, a draft notification has been issued by the CG on 24.04.2018, for public comments, notifying the following transactions for acquisition of equity shares, on which the aforesaid condition of payment of STT for applying beneficial rate of tax of 10% under section 112A shall not apply:
  • All transactions of acquisition of equity shares entered before October 1, 2004 (i.e. the date of enactment of STT); or
  • All transactions of acquisition of equity shares entered into on or after October 1, 2004, without the payment of STT, other than the following:

• approved by the SC, HC, NCLT, SEBI or RBI;
• by a non-resident in accordance with FDI guidelines;
• by investment fund referred in clause (a) of Explanation 1 to section 115UB or venture capital fund referred to in clause (23FB) of section 10 of the Act or a QIB;

1. fresh issue of share, other than by way of preferential allotment [already dealt in (a) above];
2. by scheduled banks, reconstruction or securitization companies or public financial institutions during their ordinary course of business;
3. approved by the SC, HC, NCLT, SEBI or RBI;
4. under ESOP/ ESOS scheme framed under the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;
5. by a non-resident in accordance with FDI guidelines;
6. under SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011;
7. acquisition from the Government;
8. by an investment fund referred in clause (a) of Explanation 1 to section 115UB or venture capital fund referred to in clause (23FB) of section 10 of the Act or a QIB;
9. by mode of transfer referred to in sections 47 or 50B of the Act, if the previous owner of such shares had not acquired through prohibitory modes referred to in this notification.

• Vide Finance Act, 2017, third proviso to section 10(38) was inserted which denied exemption to long term capital gains arising from sale of listed shares, which were acquired without payment of STT. In exercise of powers conferred under the aforesaid proviso, the CG vide Notification dated 5^th June 2017[2], had notified the acquisitions which were eligible for exemption of long term capital gains. (Refer our TaxBuzz dated June 08, 2017).
• This draft notification enumerates exactly similar transactions, for purposes of availing benefit of preferential rate of tax of 10% on LTCG arising from sale of such shares under section 112A of the Act. The Notification seeks to extend the said benefit to all genuine/ bonafide transactions of purchases without payment of STT, like,
• shares acquired by way of amalgamation/ demerger;
• shares acquired as gift, under will or by way of inheritance;
• shares acquired under ESOP/ ESOS scheme;
• shares acquired as per the SEBI takeover regulations;
• shares acquired/ allotted by way of bonus and right issue, unless shares fall in the category of non-frequently traded shares;
• shares acquired in a private company, which converts to a public company and gets listed on stock exchange subsequently.
• On a holistic reading of the Notification, the same broadly seeks to keep the acquisition of shares not frequently traded on stock exchanges, without payment of STT, to be outside the ambit of the preferential rate of tax. If the shares fall in the aforesaid category, the benefit of preferential rate shall not be available to the successor/ transferee, even if the shares are acquired through any mode prescribed under section 47 of the Act.
• This notification is proposed to come into force with effect from the 1st day of April, 2019 and shall accordingly apply to assessment year 2019-20 and subsequent assessment years.