Taxation woes for open offers

Only short-term investors in the 10% income bracket will get comparable returns by tendering their stocks in the HUL open offer

The numbers, while tendering shares in an open offer, seldom favour the investor. This is since stock prices tend to shoot up as soon as a company declares an open offer. Then, there is a tax blow as well for selling it through this route.

The open offer announcement by Hindustan Unilever Ltd (HUL) saw a similar a reaction from the stock. The share price shot up 17 per cent to Rs 583.60 after the company declared its intention to buy 22.52 per cent stake.

Says a tax expert, hence selling the shares in the secondary market may work out better. If you sell shares in the open offer you have to pay tax even if you've held the shares for more than a year. But no tax is applicable on long-term capital gains arising from the sale of shares in the secondary market. However, this holds true only if one is not a trader. Gains made by traders fall in the business income category.

Explains Gokul Chaudhri, partner at BMR Advisors, "Share sale in an open offer is like any other equity transaction but since there is no securities transaction tax (STT) on it, the tax authorities treat it as a debt market transaction."

So, when an HUL shareholder sells his shares through the open offer, he gets indexation benefit if the shares have been held for more than a year. That is, 10 per cent without indexation or 20 per cent with indexation, whichever is lower. On the other hand, the shareholder will be taxed at a slab rate if he has held the shares for less than a year. The capital gains will be added to his income and taxed according to the tax bracket he falls under - 10 per cent, 20 per cent or 30 per cent, that is, anywhere between Rs 44 and Rs 36.50. There will be an additional surcharge of 10 per cent if the total income exceeds Rs 1 crore.

At the same time, if a shareholder sells the shares in the secondary market, no tax would be payable if the shares are held for more than a year. However, STT at the rate of 0.1 per cent would be payabe. That would be Rs 0.583 (considering Tuesday's closing price of Rs 583.60).

And, if the shares are held for less than a year, a flat 15 per cent tax is payable in the form of short-term capital gains tax. This would be a lower tax burden for those falling in the higher tax brackets of 20 per cent and 30 per cent.

Experts say given the stock price is near the open offer price, it would make sense to hold on to the stock. There could be an upside if the company announced an additional share purchase as in the case of the open offer for GlaxoSmithKline Consumer Healthcare earlier this year. Or, if the open offer price is revised.

Of course, sale through open offer would be beneficial for those in the lower tax bracket of 10 per cent or for retirees, as their basic exemption limit is higher. "