Long-Term Capital Gains Tax Exemption Restored For Promoter Share Sales, FDI, ESOPs And Others
In a move that benefits both company promoters and many employees, the finance ministry, via a notification on Tuesday, spared several genuine equity transactions by allowing them to avail of long-term capital gains tax exemption.
The notification follows changes made by Union Budget 2017 to the income tax law to restrict practices leading to tax evasion.
The Finance Act, 2017 had provided that long term capital gains tax exemption on transfer of equity shares acquired on or after October 1, 2004 would be available only if the securities transaction tax had been paid on the acquisition.
While the government's effort was to crackdown on tax evasion via sham transactions, the sweeping nature of the provision meant several genuine transactions, such as sale of promoter equity or stock options also lost the tax exemption.
At the time, Ashok Wadhwa, founder and group chief executive officer of Ambit, had told BloombergQuint that the provision was anti-entrepreneur.
I recapitalised Ambit in 2007. And it's interesting isn't it, if I list Ambit, everybody else who buys and sells Ambit stock will get the benefit of the long-term capital gains tax exemption but the guy who worked hard, who built it all up, does not get the benefit.Ashok Wadhwa, Group CEO, Ambit
Also Read: A New Long-Term Capital Gains Tax Controversy That May Hurt ESOPs And IPO Shares
Today the Central Board of Direct Taxes notified exemptions to spare genuine transactions - such as
- Acquisition of listed shares approved by the Supreme Court, High Court, National Company Law Tribunal, Securities and Exchange Board of India or Reserve Bank of India.
- Acquisitions by scheduled banks, reconstruction or securitisation companies or public financial institutions during their ordinary course of business, will also continue to be eligible for the tax benefit.
- As will foreign direct investment and employee stock option schemes.
- Acquisition by specified venture funds, investment funds and qualified institutional buyers
Abhishek Goenka, tax partner at consultancy firm PwC. said in an emailed comment that “effectively, the notification covers ''all transactions' barring three specified transactions”.
Grant Thornton's Radhika Jain lists, in an emailed comment, the many bonafide transactions that stand to benefit.
It specifically outlines bonafide off-market transactions thatwill not be hit by the withdrawal of long term capital gains exemption,including ESOPs, shares issued pursuant to approval of regulators like SEBI andRBI, and schemes of arrangement, and also transactions that are covered withinthe ambit of capital gains exemption under Section 47 (such as between holdingand subsidiary company, a gift, will or an irrevocable trust). So the amendmentin section 10(38) introduced by the Finance Act 2017 should not have an adverseimpact on genuine M&A transactions and transfer of shares for successionplanning purposes.Radhika Jain, Director, Grant Thornton Advisory
Here are the exemptions in more detail...
The Finance Act, 2017 denied long-term capital gains tax exemption to three categories of transactions...
1. Acquisition of listed shares in preferential issues of a company whose shares are not frequently traded in a recognised stock exchange.
The CBDT notification on Tuesday spares acquisition of listed equity shares
- Approved by the Supreme Court, High Court, National Company Law Tribunal, Securities and Exchange Board of India or Reserve Bank of India.
- By any non-resident in accordance with foreign direct investment guidelines issued by the government.
- By specified investment funds, venture capital funds or a qualified institutional buyer.
- Through preferential issue to which the provisions of chapter VII of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 do not apply.
2. Acquisition of existing listed equity share in a company not through a recognised stock exchange of India.
The CBDT notification on Tuesday spares acquisition of listed equity shares (made in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956, if applicable)
- By scheduled banks, reconstruction or securitisation companies or public financial institutions during their ordinary course of business.
- Acquisition which has been approved by the Supreme Court, High Courts, NCLT, SEBI or RBI.
- Acquisition under employee stock option scheme or employee stock purchase scheme framed under relevant SEBI guidelines.
- Acquisition by any non-resident in accordance with FDI guidelines of the government.
- Acquisition of shares under SEBI's Takeover Regulations
- Acquisition from the government
- Acquisition by certain specified investment funds and venture capital funds or QIBs
3. Acquisition of shares of company during the period of its delisting.
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