Draft notification to stop misuse of long term capital gain exemption

Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes

PRESS RELEASE

New Delhi, 3rd April, 2017.

CBDT Requests for Stakeholder’s comments on Draft Notification to be issued Under Section 10(38) of the Income-tax Act, 1961

Section 10(38) of the Income-tax Act, 1961 (`the Act’), prior to its amendment by Finance Act, 2017, provided that the income arising by way of a transfer of long term capital asset, being equity share in a company, shall be exempt from tax if such transfer is undertaken after 1st October, 2004 and chargeable to Securities Transaction Tax (STT) under Chapter VII of the Finance (No. 2) Act, 2004.

In order to curb the practice of declaring unaccounted income as exempt long term capital gain by entering into sham transactions, the Finance Act, 2017 amended the provisions of section 10 (38) of the Act to provide that exemption under this section for income arising on transfer of equity share acquired or on after 1st day of October, 2004 shall be available only if the acquisition of share is chargeable to STT. However, to protect the exemption for genuine cases where the STT could not have been paid like acquisition of share in IPO, FPO, bonus or rights issue by a listed company acquisition by non-resident in accordance with FDI policy of the Government etc, it was also provided that the Central Government shall notify the acquisition for which the condition of chargeability to STT shall not apply.

In view of the above, 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. In order to have wider consultation in this matter, the draft of notification proposed to be issued under section10 (38) of the Act has been uploaded on the website www.incometaxindia.gov.in. The stakeholders are requested to submit their comments/suggestions on the draft notification by 11th April, 2017 at the email address dirtpl2@nic.in .

(Meenakshi Goswami)

Commissioner of Income Tax

(Media & Technical Policy)

Official Spokesperson, CBDT.

Draft of Notification to be issued under third proviso to the clause (38) of section 10 of the Income-tax Act, 1961

In exercise of the powers conferred by third proviso to the clause (38) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby, for the purposes of the said proviso, notifies all transactions of acquisition of equity share entered into on or after the 1st day of October, 2004 which are not chargeable to securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004, other than the following:-

(a) where acquisition of listed equity share in a company, whose equity shares are not frequently traded in a recognised stock exchange of India, is made through a preferential issue other than those preferential issues to which the provisions of chapter VII of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 does not apply;

(b) Where transaction for purchase of listed equity share in a company is not entered through a recognised stock exchange;

(c) Acquisition of equity share of a company during the period beginning from the date on which the company is delisted from a recognised stock exchange and ending on the date on which the company is again listed on a recognised stock exchange in accordance with the Securities Contracts (Regulation) Act,1956 read with Securities and Exchange Board of India Act,1992 and any rules made there under;

Explanation, –for the purpose of this notification, –

(a) “Frequently traded shares ” means shares of a company, in which the traded turnover on a recognised stock exchange during the twelve calendar months preceding the calendar month in which the transfer is made, is at least ten per cent of the total number of shares of such class of the company:

Provided that where the share capital of a particular class of shares of the company is not identical throughout such period, the weighted average number of total shares of such class of the company shall represent the total number of shares

(b) ‘Listed’ means listed in a recognized stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and any rule made there under

(c) “Recognised stock exchange” shall have the same meaning as in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).