Start-ups, FDI to be exempt from new tax on unlisted firms

Exemption list will make it clear that FDI coming via automatic route, FIPB won't be impacted: Govt

Allaying investor fears over levy of long-term capital gains tax on share transfer in unlisted companies, the government on Friday said the move is only to target 'khoka' companies and 'genuine investments' in start-ups and through foreign direct investment will be exempt.

In an interview, Revenue Secretary Hasmukh Adhia said securities transaction tax (STT) was levied in 2004 and capital gains made out of STT-paid listed stocks are exempt from long-term capital gains tax.

"This is only available for listed securities. But people tried to use this window by creating one 'khoka' (shell) company, putting some investment in it (which is worthless), showing appreciation in that and then listing it and then (quickly) getting out of it," he said.

In effect, the investment was held for more than one year, but they exited the investment immediately after listing.

"So, it was the best route for converting entire black money into white without payment of any tax. This is how people tried to do it. By creating shell companies," he said.

The government is now saying such investors should have paid STT both at the time of entry and exit.

But the Budget has changed this by providing for long-term capital gains tax on shares transfer in unlisted companies after October 1, 2004 if STT had not been previously paid.

"Now, in the law, we have got powers to exempt certain categories of person from this requirement. So, we will consider all genuine cases in which exemption notification is required to be issued and will do so," he said.

Adhia said that if foreign direct investment has come after taking proper approvals, exemptions will kick in.

"So, most of the start-up investment which is coming in through FDI route will be exempt. If domestic investment is made in eligible start-up, then also we will exempt it. So, we have to differentiate between shady and genuine transactions," he said, adding that this was an "anti-abuse measure".

The Revenue Secretary said the exemption list will make it clear that FDI coming through the automatic route or FIPB will not be impacted. "Problem is only with domestic investment made in unlisted stock to jack up the value. But in this process, we will ensure genuine investment in start-up will not be affected," he said.

Finance Minister Arun Jaitley in his Budget for 2017-18 proposed 10 per cent long-term capital gains tax on those who acquired shares in unlisted companies after October 1, 2004 if they had not paid securities transaction tax at the time of purchase.