Section 112(1)(c) – Long-term capital gains on shares of a company, not being a company in which public are substantially interested, to be eligible for concessional rate of tax @ 10%

Issue/Justification

Section 112(1)(c)(iii) was introduced in the year 2012 to extend the beneficial rate of tax at the rate of 10 percent, on long-term capital gains (which was earlier only available to Foreign Institutional Investors) to other non-resident investors including Private Equity Investors.

The Finance Act, 2016 amended Section 112(1)(c)(iii) of the Act to replace the word ‘unlisted securities’ with ‘unlisted securities or shares of a company not being a company in which the public are substantially interested’ with retrospective effect from FY 2012-13.

It has been stated in the Memorandum explaining the Finance Bill, 2016 that under the existing provisions of Section 112(1)(c)(iii) of the Act, a view was taken by some of the Courts that shares of a Private Company do not constitute ‘Securities’ under SCRA.

The amendment has been made to clarify that the section was introduced with an intention to extend the benefit to LTCG arising on shares of a company, being a company in which the public are not substantially interested (i.e. private company) as well.

Suggestion

It is suggested that the benefit of concessional rate of 10% be extended to resident shareholders also on sale of shares of a company not being a company in which public are substantially interested.

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax)

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