Suggestions on Clauses 6 of Finance Bill 2017 – Section 10(38) – Exemption of long term capital gains subject to payment of STT on acquisition – bona fide transactions to be notified by the Central Government for exemption even if STT not paid on acquisition

Section 10(38) of the Income-tax Act, 1961, inter alia, provides for an exemption from tax on the income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, where such transaction is chargeable to securities transaction tax under Chapter VII of the Finance(No.2) Act, 2004.

The Finance Bill 2017 proposes to amend the said clause (38) so as to provide that any income arising from the transfer of a long term capital asset, being an equity share in a company shall not be exempted, if the transaction of acquisition, other than the acquisition notified by the Central Government in this behalf, of such equity share is entered into on or after the 1st day of October, 2004 and such transaction is not chargeable to securities transaction tax under Chapter VII of the Finance(No. 2) Act, 2004.

The intent of the Government behind the proposed amendment is to prevent misuse of section 10(38) of the Act whereby some taxpayers declare their unaccounted income as exempt long-term capital gains by entering into sham transactions. Further, the Memorandum to the Finance Bill 2017 states that exemption for genuine cases where the securities transactions tax could not have been paid like acquisition of share in IPO, FPO, bonus or right issue by a listed company, acquisition by non-resident in accordance with FDI policy of the Government etc. would be available and list of such transfers for which the condition of chargeability to securities transactions tax on acquisition shall not be applicable would be notified.

This anti-abuse measure appears to be targeted at gains arising from transfer of penny stock also. Therefore, appropriate provisions may be introduced to explicitly define the term “penny stock” so as to deny exemption under section 10(38) in respect of gains arising from transfer of the same.

Suggestion:

It is suggested that:

(1) Instead of the requirement of payment of STT on acquisition, it would be desirable to categorically define a list of sham transactions which would not be entitled to exemption of LTCG. This would automatically provide benefit to genuine investors.

(2) Notwithstanding the above, alternatively, for the purposes of section 10(38), it is suggested that the exemption list to be notified should, inter alia, include:

> Shares which get listed pursuant to an ‘PO/ FPO;

> Shares issued under ESOP/ ESPS scheme;

> Shares issued or transferred pursuant to corporate re-structuring’s such as merger / demerger;

> Shares issued on Preferential allotment/ QIP;

> Shares acquired pursuant to a transaction not regarded as transfer u/ s Section 47 of the Act where STT was paid on the underlying shares by the previous owner;

> New shares received by the shareholders on consolidation / bonus / rights / split of existing shares where STT was paid on the underlying shares;

> Off-market share deals where such deal cannot be executed on-market due to pricing restrictions (i.e. transactions which do not meet the bulk deal / block deal parameters);

> Shares acquired pursuant to family arrangement/ settlement on where STT was paid on the underlying shares by the previous owner;

> Acquisition of shares on which STT was paid by way of transmission, succession or inheritance;

> Contribution of shares to LLP/ Partnership firm;

> Inter-se transfer of shares within the promoter group which is in compliance with Takeover Code or subject to SEBI

(3) Appropriate provisions may be introduced to explicitly define the term “penny stock” so as to deny exemption under section 10(38) in respect of gains arising from transfer of the same.

Source- ICAI Post-Budget Memoranda-2017

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