New Delhi, April 3, 2017

Draft to include purchase of shares of delisted firms, acquisition of shares of listed firm infrequently traded

The Central Board of Direct Taxes (CBDT) has specified a list of equity share sale transactions that will have to comply with the new Budget provision and pay long-term capital gains tax if securities transaction tax was not paid.

These include purchase of shares of a listed company that are not frequently traded through preferential issue, transaction for purchase of listed equity share in a company is not entered through a recognised stock exchange and acquisition of shares of a company during the period it was delisted from recognised stock exchanges.

“It is proposed to notify that the condition of chargeability to STT shall not apply to all transactions of acquisitions of equity shares entered into on or after the first day of October, 2004 other than the specified transactions,” said the CBDT in a statement on Monday.

It has now issued a draft notification to this end and has sought stakeholder comments by April 11 to finalise the proposal.

“Frequently traded shares means shares of a company, in which the traded turnover on a recognised stock exchange during the 12 calendar months preceding the calendar month in which the transfer is made, is at least 10 per cent of the total number of shares of such class of the company,” said the CBDT.

The proposal, which will give relief to genuine investors, has been mooted by the CBDT following the Budget announcement to exempt from long-term capital gains tax only if STT had been levied on purchase of shares and other “genuine cases” such as public offers.

The Finance Act, 2017 amended the provisions of Section 10 (38) of the Income-Tax Act to provide exemption from long-term capital gains tax for income from transfer of equity share acquired on or after October 1, 2004, provided that the transaction had been charged for STT.

All stock market transactions attract STT in the range of 0.017 per cent to 0.125 per cent.

The restriction was expected to curb tax evasion by showing them as sham transactions in stock markets.

But to protect the exemption for genuine cases, where the STT could not have been paid, such as for acquisition of share in initial public offer, follow on offer, bonus or rights issue by a listed company, acquisition by non-residents in accordance with foreign direct investment norms, the government had said that it would notify the acquisitions for which the condition of chargeability to STT shall not apply.

Tax experts said this would provide clarity.

“Aiming to limit litigation that may have arisen on this subject, instead of providing a list of transactions that shall remain outside the purview of this amendment, the draft notification provides that long term capital gain exemption shall be available in all cases except the specified transactions,” said Rakesh Nangia, Managing Partner, Nangia & Co.

[The Hindu Business Line]