Lakshmisha S, Director – M&A Tax, PwC India

Lakshmisha SBackground

The Finance Act, 2018, withdrew the exemption for long-term capital gains on the sale of listed equity shares, units of equity oriented mutual fund or business trust, etc., (subject to certain conditions) and subjecting such gains to tax at a concessional rate of 10% under section 112A of the Income-tax Act, 1961 (Act).

Further, the Act grandfathered the gains accrued up to 31 January, 2018 (i.e. prior to introduction of the Finance Bill, 2018).

Such long-term capital gains are now subjected to tax at a concessional rate of 10% if the following conditions are satisfied:

  • Condition 1: Such assets are held for a minimum period of 12 months from the date of acquisition;
  • Condition 2: Securities Transaction Tax (STT) is paid on the transfer of such assets at the time of transfer; and
  • Condition 3: STT should have been paid even at the time of acquisition (except in certain specified cases).

The central government issued a notification on 01 October, 2018 (Notification), whereby, the following transactions have been exempted from satisfying Condition 3 above (i.e. the requirement of payment of STT upon acquisition):

  • Acquisition of equity share made before 01 October, 2004 (since STT was only introduced with effect from 01 October, 2004);
  • Acquisition of equity share made on or after 01 October, 2004, which are not chargeable to STT.

However, the Notification prescribes specific classes of transactions that are ineligible for availing the concessional rate of 10% (along with exceptions thereto):

I. Acquisition of infrequently traded equity shares (as specifically defined) on a recognised stock exchange pursuant to a preferential issue.

This class of transaction covers the primary acquisition of shares and applies only to shares of infrequently traded listed equity shares. However, the following modes of acquisition would still be eligible for the 10% rate specified under section 112A of the Act:

a) Acquisition approved by the Supreme Court, High Court, National Company Law Tribunal (NCLT), Securities and Exchange Board of India (SEBI) or Reserve Bank of India (RBI) in this behalf;

b) Acquisition by any non-resident in accordance with extant Foreign Direct Investment (FDI) regulations;

c) Acquisition by a Category I or Category II Alternate Investment Fund (AIF) or a Venture Capital Fund (VCF) or a Qualified Institutional Buyer (QIB);

d) Acquisition through a preferential issue to which provisions of Chapter VII of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (SEBI ICDR) do not apply in the following cases:

– Shares issued pursuant to conversion of convertible loans or convertible debentures under section 62(3) of the Companies Act, 2013 (2013 Act) or corresponding provisions under the Companies Act, 1956 (1956 Act);

– Shares issued pursuant to conversion of loans availed or debentures issued to the government pursuant to an order under section 62(4) of the 2013 Act or corresponding provisions under the 1956 Act;

– Shares issued pursuant to a scheme of arrangement under sections 230 to 234 of the 2013 Act;

– Shares issued pursuant to a resolution plan approved by the NCLT under the Insolvency and Bankruptcy Code, 2016;

– Shares issued pursuant to a rehabilitation scheme approved by the Board of Industrial and Financial Reconstruction under the Sick Industrial Companies (Special Provisions) Act, 1985; and

– Shares issued to a stabilising agent pursuant to the exercise of green shoe option under Regulation 45 of the SEBI ICDR.

II. Acquisition of existing listed equity share in a company not entered through a recognised stock exchange of India 

This class of transaction covers the secondary acquisition of shares. Notably, unlike under Para I above, this class covers all listed equity shares (even the frequently traded equity shares).

However, the following modes of acquisition would still be eligible for the 10% rate specified under section 112A of the Act:

a) Acquisition through an issue of shares by a company other than the modes of issuance permitted under Para I above.

b) Acquisition by scheduled banks, reconstruction or securitisation companies or public financial institutions during their ordinary course of business.

c) Acquisition that has been approved by the Supreme Court, High Court, NCLT, SEBI or RBI in this behalf.

d) Acquisition under employees’ stock option scheme or employee stock purchase scheme framed under the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

e) Acquisition by any non-resident in accordance with extant FDI regulations.

f) Acquisition of shares of a company under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

g) Acquisition from the government.

h) Acquisition by a Category I or II AIF or a VCF or a QIB.

i) Acquisition pursuant to a mode of transfer referred to in section 47 of the Act, i.e., transactions not regarded as “transfer” for the purposes of the Act. This broadly includes the following, inter alia:

– Shares issued pursuant to a scheme of arrangement under sections 230 to 234 of the 2013 Act;

– Shares issued pursuant to a resolution plan approved by NCLT under the Insolvency and Bankruptcy Code, 2016.

j) Acquisition pursuant to a “slump sale” undertaken in accordance with section 50B of the Act.

k) Acquisition pursuant to transfer of shares by a person to a firm or other Association Of Persons (AOP) or Body Of Individuals (BOI) (other than a company or a co-operative society) as per section 45(3) of the Act

l) Acquisition pursuant to distribution of shares on the dissolution of a firm or other AOP or BOI (other than a company or a co-operative society) as per section 45(4) of the Act.

In case of acquisition under clauses (i), (j), (k) and (l) above, such shares would be eligible only if the acquisition by the previous owner was undertaken in a mode eligible for the 10% rate specified under section 112A of the Act.

III. Acquisition of equity share of a company post delisting of such share from a recognised stock exchange and prior to relisting on a recognised stock exchange.

Prima facie, this appears to cover both primary as well as secondary acquisitions during the stipulated period.

The government could specifically clarify the eligibility of the lower rate for the following transactions:

  • Acquisition pursuant to conversion of ECB
  • Acquisition pursuant to succession, inheritance or devolution
  • Acquisition pursuant to distribution of assets on liquidation of a company

The views expressed in this article are personal. This article  includes inputs by Anirudh Tadanki – Manager, M&A Tax, PwC India, Hemant Pai – Associate – M&A Tax, PwC India.

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2 responses to “Section 112A – Long-term capital gain on listed securities: Recent developments”

  1. RAVI says:

    If the shares were allotted as preferential allotment in say, 2015 when the company was unlisted, and sold through stock exchange after listing in June’18, will the grand fathering clause be applicable?

  2. raghunath says:

    what about bonus and rights of listed companies???

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