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Foreign companies or individuals, including foreign institutional investors, having business or profession in India can enjoy lower capital gains tax on off-market deals if the stocks are purchased in foreign currency.
According to a recent decision of the Mumbai bench of the Income Tax Apellate Tribunal, non-resident companies and individuals are entitled to a beneficial rate of tax of 10% on long-term capital gains arising from the sale of shares of listed entities. Earlier, non-resident assessees were taxed at the rate of 20%.

Currently, off-market deals attract a capital gains tax of 20% with indexation benefit (where the gain is adjusted for inflation) and 10% without indexation benefit. While this was largely perceived to apply to residents, the tribunal has now spelt out that foreigners are also entitled to the lower rate of tax.

There should not be any discrimination between a foreign and an Indian entity in this regard, said the tribunal.

The tribunal further held that non-resident assessees can also use the option of adopting fair market value of shares while calculating the cost of acquisition of such shares. Under the Income Tax Act, companies can claim April 1, 1981, as the date of acquisition of shares for transactions effected prior to April 1981. However, this benefit was earlier not allowed to foreign companies.

The decision of the tribunal’s Mumbai bench will benefit companies and non-residents that are currently making huge investments in shares of Indian companies. Such companies have been seeking advance ruling on the issue, prior to effecting such transactions.

The tribunal’s decision was passed in the case of Chicago Pneumatic Tool, which had sold shares of an Indian company, consisting of ordinary shares and bonus shares. For calculating the acquisition cost, the assessee computed its long-term capital gains tax liability and applied the prevailing exchange rate. Subsequently, the assessee also claimed the option of fair market value of the shares by indexing the value to April 1, 1981.

Since Chicago Pneumatic Tool claimed fair market value for calculating its acquisition cost, the assessing officer of the I-T department held that the beneficial rate of 10% won’t apply as the benefit of indexation is not available to non-resident assessees.

The assessee’s counsels contended that the benefit of lower tax rate of 10% is applicable and what is relevant is the gain arising from the transaction and not the status of the assessee. The tribunal held that the eligibility to avail the benefit of indexed cost is not a sine qua none—a pre-requisite—for applying the reduced rate of 10%, prescribed in Section 112(1) of the Income Tax Act. Relying on the judgements passed in the cases of McLeod Russel India and Alcan Inc, the tribunal said Chicago Pneumatic Tool is entitled to 10% rate of tax.

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  1. Sanjeev says:

    What’s the tax treatment on foreign shares gain/loss earned by a resident indian? Does 12 month rule for Long Term apply to gain/loss on foreign shares.

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May 2024