More clarity needed regarding availing concessional LTCG tax: View
The consultative and pro-active approach adopted by CBDT is appreciable since unintended hardships may be experienced in certain fact specific cases.
Finance Act 2018 brought a radical change in taxation of long-term capital gains (LTCG) arising on transfer of equity shares of company, units of equity oriented mutual funds and units of business trust ('specified capital asset'). The amendment has withdrawn the exemption granted under section 10(38) of Income-tax Act, 1961 ('ITA') and introduced concessional 10% tax (plus applicable surcharge and cess) on LTCG exceeding Rs 1 lakh. Further, all gains arising on specified capital asset up to 31 January 2018 have been grandfathered.
The new capital gains taxation scheme is applicable subject to following conditions:
a) Total income of the taxpayer should include LTCG arising on transfer of specified capital asset; and
b) Securities Transaction Tax (STT) is paid on acquisition and transfer of equity shares and transfer of units of equity oriented mutual fund and units of business trust.
Section 112A (4) of ITA empowers the central government to specify the nature of acquisition in respect of which condition of payment of STT is relieved on equity shares, thereby making them eligible for concessional 10% tax on LTCG despite non-payment of STT on acquisition. This is akin to exemption available under section 10(38) to non-STT based acquisitions as notified under Notification No. 43/2017 dated 5 June 2017.
The Central Board of Direct Taxes (CBDT), issued a draft notification on 24 April, ('draft Notification') to provide exemption from condition of payment of STT on all transactions of acquisition of equity share except for specified list of acquisition mentioned therein entered on or after 1st October 2004.
The specified list of acquisition of shares which are not eligible for concessional 10% tax on LTCG is identical to the list as specified under Notification No. 43/2017, which is as follows:
a) Acquisition of existing listed equity shares which are not frequently traded on an recognised stock exchange (RSE) by way of preferential issue
b) Acquisition of existing listed equity shares otherwise than through an RSE
c) Acquisition of unlisted equity shares during the period between the delisting and day immediately preceding the re-listing of such shares on RSE.
Alongside such list of acquisition of equity shares which are not eligible for concessional 10% tax on LTCG, the draft notification also provides carve-outs to insulate genuine acquisitions of non-STT based acquisitions like Initial Public Offering, Follow-on Public Offering, bonus or rights issue by a listed company, acquisition approved by Court/NCLT/SEBI/RBI, acquisition pursuant to exercise of ESOPs, etc., for which concessional 10% tax on LTCG shall continue to apply.
The draft Notification provides another opportunity to stakeholders to convey their concerns which were not addressed earlier by Notification No. 43/2017, by 30 April 2018.
The consultative and pro-active approach adopted by CBDT is appreciable since unintended hardships may be experienced in certain fact specific cases. For instance, clause (II) (c) of draft Notification deals with situation of denial of concessional 10% tax on LTCG in respect of acquisitions during intervening period i.e. the period of de-listing of company and the day prior to its re-listing. Since the intervening period is the period when the shares are de-listed, the question of acquisition on stock exchange or payment of STT does not arise. Consider an example such that shares are acquired by Mr. A when the company was listed on recognised stock exchange. Such shares are gifted by Mr A to Mrs A during the intervening period. Mrs A offloads shares when company is again listed on recognised stock exchange after payment of STT. In this case, it may be difficult for Mrs A to claim concessional 10% tax on LTCG as Mrs A would have said to acquire the unlisted shares from Mr A during the intervening period irrespective of the fact that Mr. A may have paid STT at the time such shares were acquired by him.
Also, there may be concerns when acquisition is outside the stock exchange but on account of events such as liquidation, contribution of shares to the firm, dissolution of the firm etc.
The stock exchange mechanism, read with regulatory process, has been evolving over a period. The methodologies and the Regulations which are in vogue today and which are popular today were not necessarily available or popular over the last 13 years. Considering this, the list of acquisition not eligible for concessional rate needs to be formulated keeping also in view the circumstances which prevailed as of 01 October 2004.
The industry hopes for greater clarity with respect to some of these cases in the Final Notification that will be released by CBDT.
(Garima Pande, Partner & Business Tax Services Leader, EY India. Aakash Uppal, Tax Director , EY also contributed to the story.)