Taxation of gains arising from transactions in listed securities have been a subject matter of debate for quite some time now. In the past, the income tax law provided a significant tax advantage to investors by exempting long-term capital gains (LTCG) tax on transfer of equity and similar instruments (subject to payment of securities transaction tax (STT)).

The initial move towards taxing capital gains of listed equity instruments was made through the Finance Act, 2017, which sought to deny exemption from the capital-gains tax if the shares were acquired on or after October 1, 2004, and such acquisition was not chargeable under STT.

However, with the stated intent of protecting capital-gains tax exemption for genuine acquisitions, the government in 2017 notified transactions that would continue to be exempt from capital-gains tax. Subsequently, Finance Act, 2018, brought in a paradigm shift in the government policy towards taxation of LTCG arising on transfer of equity shares of company, units of equity-oriented mutual funds and units of business trusts (specified capital asset).

This amendment withdrew the exemption granted from capital gains tax and introduced 10 per cent LTCG tax (plus applicable surcharge and cess) on gains arising from transfer of specified capital assets.

New scheme

The new capital gains taxation scheme, however, is applicable where the income of the taxpayer includes LTCG arising on transfer of specified capital asset and STT is paid on acquisition and transfer of such asset.

The other key elements of this amendment are a threshold limit of ₹1 lakh and grandfathering of gains accrued till January 31, 2018.

The new provisions also empower the government to specify the acquisitions for which the 10 per cent LTCG tax is available despite non-payment of STT on acquisition.

Accordingly, the Central Board of Direct Taxes (CBDT) issued a draft notification for public comments on April 24, 2018. The draft notification is identically worded as that of the 2017 notification, which provides for exemption from condition of payment of STT on all equity shares, except for a negative list of shares acquired on or after October 1, 2004. The negative list is as follows:

(a) Acquisition of existing listed equity shares which are not frequently traded on a recognised stock exchange (RSE) by way of preferential issue;

(b) Acquisition of existing listed equity shares not through an RSE; and

(c) Acquisition of unlisted equity shares during the period between the de-listing and a day immediately preceding the re-listing of such shares on RSE.

Genuine acquisitions

Alongside the negative list, the draft notification also provides carve-outs to insulate genuine acquisitions, for which the 10 per cent LTCG shall continue to apply. It proposes to protect genuine cases of non-STT-based acquisitions such as 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 (employee stock ownership plan), etc. The 2017 notification was also issued after public consultation.

While the notification is welcome for its pro-active approach, some of the issues such as scope of ‘existing listed shares’ and acquisition of convertible instruments are susceptible to diverse interpretations (as in the case of the earlier notification, too).

Also, there may be concerns when the acquisition is outside the stock exchange but on account of events such as liquidation, contribution of shares to a firm, dissolution of a firm, etc.

This notification is expected to come into force with effect from April 1, 2019, and shall accordingly apply from assessment year 2019-20 onwards.

The writer is Tax Partner, EY India. Ridhi Khanna, senior tax professional, EY, also contributed to the article.

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