Information: The Finance Bill 2017 has amended S. 10(38) of IT Act to restrict the exemption from long-term capital gains on sale of listed equity shares, acquired on or after 1 October 2004, only if Securities Transaction Tax (STT) has been paid both at the time of acquisition and divestment.

The Memorandum explaining the Bill had provided that the intent of the amendment is to prevent abuse as it is noticed that certain persons were misusing the exemption for declaring their unaccounted income as exempt gain using dubious/sham mechanisms.

The Memorandum however further explained that genuine cases would be protected where STT could not have been paid (eg. acquisition of shares in IPO, FPO, bonus or rights issue of a listed company acquisition by non-resident in accordance with FDI policy of the Government, etc), and that the Central Government shall notify such other exceptions where continues to remain protected from such chargeability.

The CBDT has now released a press release along with a draft notification on 3 April 2017 for wider consultation wherein they have 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.

Basis such non-adversarial statement, the notification lists the following three scenarios where the proviso would trigger and the tax exemption on Listed Shares [S. 10(38)] would not be available:

a. any acquisition of listed but ‘not frequently traded’ equity shares, made through a preferential issue by a company. However, this does not cover those preferential issues to which the provisions of chapter VII of SEBI ICDR regulations do 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 between the period of delisting and relisting (possibly the suspension period) of such shares in accordance with the Securities Regulations.

With respect to (a) above, SEBI ICDR (Reg.70 under Chapter VII) carves out an exception for the following preferential issue of equity shares where all or select provisions of this Chapter will not apply:

1. conversion of loan or convertible debt instruments under S. 62(3) or (4) of the Cos Act 2014.

2. under Schemes (includes merger/demerger) approved by High Court u/s. 391-394 of Cos Act 1956 or by NCLT under S. 230-234 of Cos Act 2013.

3. Rehabilitation schemes approved by BIFR under SICA 1985

4. For conversion of debt into Strategic debt restructuring scheme to a consortium of banks and financial institutions in accordance with the RBI guidelines.

The preferential allotment of equity shares even by a non-frequently traded listed co in such cases carved out under Chapter VII of SEBI ICDR would not become taxable under the proviso to Section 10(38).

Ravi Mehta, Partner, Grant Thornton India LLP said that  “The open wordings of clause (b) of the Notification may have a wider ramifications. On a literal reading it could encompass both primary as well as secondary transactions, including genuine transactions such as purchase of shares under ESOP, fresh fund raise by listed companies from Promoters or Financial Investors during down-turn, genuine off-market purchases such share acquisition where price also include control premium, off-market purchase-sale within family either from the perspective of family arrangement or securing funds, off-market purchase-sale between promoter and  strategic/financial investors, etc. In many of these cases, income tax would have been properly discharged by the sellers, and hence, there would be no effective revenue loss to the exchequer. Exposing such genuine transactions to the proviso of S.10(38) would only cause hardships to the business, and is against the genesis behind the introduction of such proviso (viz., to only cover sham transactions).  Hence, the scope of clause (b) of the notification merits proper elaboration with expressive scope restrictions being laid out in like manner as done in clause (a).

Overall, the amendment in form of proviso to S. 10(38) is an anti-abuse measure, and a step forward to the Government’s agenda of cracking unaccounted money. Equally important is the Government’s commitment to notify genuine transactions that remain outside the fold of this amendment. Any open-ended wordings in the Notification, like the one existing in clause (b), will only cause hardships to business while creating uncertainty for tax-payers. Hence, plugging these loose-ends would be paramount.”

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One response to “Draft rules on Sec 10(38) exemption carve-outs by CBDT”

  1. Kalyan says:

    I had received physical shares from my father which were purchased by him in IPO around 1990 now I am holding these shares in demateralized form and If I sell these shares whether I will lose the benefit of Long term Capital gain exemption under the present situation?

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