Foreign companies cannot be discriminated vis-a-vis Indian firms so far as capital gains tax on securities transaction is concerned, according to an order by the Authority for Advance Rulings (AAR).

Giving its ruling in a case related to UK-based Fujitsu Services, AAR said the company should also be given an option of paying tax at lesser rate of 10% as per the provisions for taxation of gains from securities transaction.

“Applicant (Fujitsu Services) is liable to pay tax at the lesser rate of 10% as per the provision to section 112(1) of the Act apart from the surcharge and cess,” the order said. As per provisions for capital gains tax, shareholders need not pay any tax on gains from share transactions if they keep shares for at least a year and pay securities transaction tax (STT) on them.

If they do not pay STT, then there are two kinds of tax rates applied to domestic companies.

In case, such companies opt for indexation, that is if they adjust for price changes in the economy, then they have to pay tax at the rate of 20% and if they do not opt for indexation, they will have to pay tax at the rate of 10%.

Fujitsu Services seeking an advance ruling by AAR asked if the Tax Deduction at Source (TDS) has to be made at the rate of 20% or they can pay at a lesser rate of 10% as they have not availed the benefit of indexation, allowed in case of long-term capital gains. However, the tax department argued that since option of 10% tax has not been given to the foreign firms, they cannot be taxed at a less rate of 10% even if they have not taken the benefit of indexation.

AAR, however, allowed the company to not opt for indexation and pay lesser tax at 10%. Fujitsu acquired shares in Zensar Technologies, an Indian company by making payments in foreign currency between 1963 and 1994 which constituted 26.55% of the entire capital of Zensar.

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January 2021