India Inc saves big by timely restructuring

Inter se transfers worth Rs 2 lakh cr carried out in March, potentially saving Rs 30,000 cr in tax

Promoters who restructured their shareholdings in March could be having the last laugh. Anticipating an adverse outcome from the Budget proposal to introduce anti-abuse provisions in long-term capital gains tax benefits, promoters carried out inter se transfers of shareholding worth Rs 2 lakh crore. 

According to new regulations, which have come into effect from April 1, 2017, all transactions involving shares acquired without paying the the securities transaction tax will be subject to capital gains tax. 

The tax department, while releasing the final regulations on June 5, provided a list of transactions that were exempt from these provisions. Inter se promoter transfers are not part of this list.  

“The government was not inclined to provide relief to inter se transfers. Although it received feedback from industry seeking exemption, it was not considered. Many Indian promoters had got the hint that the government would not add such deals to the exemption list. Hence, they rushed to restructure their holdings before the new regulations kicked in,” said a source.

Some of the companies that undertook inter se transfers in March include Reliance Industries, Bajaj Corporation, Aurobindo Pharma, Hero MotoCorp, IRB Infra and Indiabulls Housing Finance. 

Going forward, a 15 per cent capital gains tax will be levied on share transactions. At this rate, India Inc has saved approximately Rs 30,000 crore in tax by wrapping up the transactions before April 1, 2017.

In many companies, promoters own their stakes through family trusts or limited liability partnerships that acquired these holdings in off-market deals. Such deals done outside the stock exchange platform do not attract the STT. 

The tax authority has specified three scenarios in which capital gains will be applicable if shares were acquired without paying the STT.

Inter se transfers fall under the second category. Although mergers and acquisitions and employee stock options also fall in this category, these have been exempted.

According to Girish Vanvari, national head of tax, KPMG, certain areas are still left out. “Apart from inter se transfer of equity shares between promoters, transactions that have been left out of the ambit of exemptions include issue of shares against warrants, issue of shares on settlement of dues under a scheme of debt restructuring and strategic acquisitions by private investors,” he said.

Tax experts said transactions like inter se promoter transfers should be provided exemption as these were undertaken for corporate restructuring. In a majority of cases, they are a part of succession planning.

Illustration by Ajay Mohanty