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Relief for genuine transactions: ESOPs, M&As out of capital gains tax ambit

The regulations will only apply to the share purchases that have been done after October 1, 2004

Pavan Burugula 

The rules are primarily aimed at curbing tax evasion through trading in penny stocks

The (CBDT) has provided relief for genuine transactions through which were acquired without paying the (STT). 

According to final regulations released on Tuesday, the board provided exemptions for (ESOPs) and duly approved mergers and acquisitions (M&As). It also kept 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 acquired through debt-equity conversion under a loan restructuring out of the purview of the rules. Only three scenarios will attract capital gains if were acquired without paying the The first scenario is when listed 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 loopholes in the capital gains tax regime. “The final guidelines are exhaustive yet simple. They have dispelled every genuine concern. At the same time, the has cracked the whip on investors who use the long-term capital gains tax exemption to re-route unaccounted money,” said Girish Vanvari, partner and national head of tax, KPMG.

The second scenario in which long-term capital gains tax will be applicable is where have been acquired outside the platform. The third scenario is when an investor buys just after a firm 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 long-term 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 against warrants, inter-se transfer of 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 broad-based funds.

The Union Budget 2017-18 had proposed introduction of anti-abuse provisions and had said the long-term capital gains tax exemption on transfer of acquired on or after October 1, 2004, would be available only if the was paid at the time of acquisition. However, this move would not have allowed the exemption in several genuine cases where the could not have been paid. Subsequently, the sought opinion from stakeholders and issued the notification today.

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




First Published: Wed, June 07 2017. 09:08 IST