Transaction Tax Alert - CBDT notifies transactions not qualifying for long term capital exemption on sale of listed equity shares
07 June 2017
Background
- Section 10(38) of the Income-tax Act, 1961 (‘IT Act’) provides an exemption on income arising from transfer of long–term capital asset, being equity shares in a company or a unit of an equity oriented fund, if such transaction is chargeable to securities transaction tax (‘STT’).
- The Finance Act, 2017 inserted a new proviso to Section 10(38) which restricted the abovementioned exemption for equity shares only if the acquisition of shares is made on or after October 1, 2004 and such acquisition was chargeable to STT ('New Exemption Conditions'). However, it provided a carve out for transactions (to be notified) which will continue to enjoy the exemption.
Notification
- Vide notification dated June 5, 2017 (‘Notification’), the Central Board of Direct Taxes (‘CBDT’) has notified negative categories of transactions which would not be eligible for long term capital gains exemption [‘Section 10(38) exemption’] in terms of proviso to Section 10(38). However, against each such negative category, the Notification also prescribes type of transactions where Section 10(38) exemption would continue to be available even when New Exemption Conditions are not met.
Summary of negative category transaction and exceptions thereto is given in the table below:
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Negative category transactions i.e. Transactions where the long term capital gain exemption will not be available
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Exceptions to negative category i.e. Transactions where the long-term capital gain exemption will continue to be available even where New Exemption Conditions are not satisfied
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- Acquisition of existing equity shares in a listed company, which are infrequently traded in a recognized stock exchange (‘RSE’) of India, through preferential issue
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The acquisition of listed equity shares is:
- Approved by Supreme Court, High Court, National Company Law Tribunal (‘NCLT’), by Securities & Exchange Board of India (‘SEBI’) or Reserve Bank of India (‘RBI’) in this behalf
- Made by a non-resident in accordance with foreign direct investment guidelines issued by the Government of India
- By a SEBI registered investment fund [i.e. Category I and Category II Alternative Investment Fund (‘AIF’)] or a Venture Capital Fund referred to in Section 10(23FB) of the IT Act or a Qualified Institutional Buyer (‘QIB’)
- Through preferential issue to which SEBI (Issue of Capital & Disclosure Requirements), 2009 do not apply
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- Acquisition of existing listed equity shares in a company which is not entered through a RSE
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The acquisition of shares is:
- Through an issue of shares by a company other than issue referred to in point (a) above
- By scheduled banks, reconstruction or securitization companies or public financial institutions during their ordinary course of business
- Approved by Supreme Court, High Court, NCLT, SEBI or RBI in this behalf
- Under employee stock option plan scheme (‘ESOP’) or employee stock purchase scheme framed under the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999
- By a non-resident in accordance with foreign direct investment (‘FDI’) guidelines issued by the Government of India
- Made under SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011
- From the Government
- By a SEBI registered investment fund or a Venture Capital Fund or a QIB
- By mode of transfer referred to in Section 47 of the IT Act (such as gift, merger, demerger, transfer between 100% parent-subsidiary, conversion of company into LLP, etc), if the transferor has not acquired shares through any negative categories
- Under a slump sale arrangement, if the Seller has not acquired shares through any negative categories
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- Acquisition of equity shares of a company between the date on which the company is delisted from a RSE and the date immediately preceding the date on which the company is re-listed on a RSE
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No exceptions are provided w.r.t. such a transaction
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- CBDT has further defined the terms “frequently traded shares”, “listed”, “preferential issue”, “public financial institution”, “recognized stock exchange” and “reconstruction company and securitization company”.
- This Notification shall come into force with effect from Assessment Year 2018-19 i.e. Financial Year 2017-18
Our comments
- The final notification issued by CBDT has addressed most concerns pertaining to share acquisition transactions such as acquisition under ESOP, acquisition under FDI route, acquisition approved by regulators such as NCLT / RBI / SEBI or acquisition of shares by investors like Category -I & II AIFs, QIBs, etc.. These concerns were raised by the stakeholders when the CBDT released draft notification on April 03, 2017 inviting comments.
- However, transactions like acquisition by way of strategic buy-outs which is carried out in an off-market mode due to bulk quantities, restructuring involving contributions to Limited Liability Partnerships / Firms, could have tax implications unless the same falls under any of the notified exceptions.