EY Tax Alert Central Government notifies the transactions of listed equity shares not eligible for Long Term capital gains exemption

Transcription

1 6 June 2017 EY Tax Alert Central Government notifies the transactions of listed equity shares not eligible for Long Term capital gains exemption Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. Executive summary This Tax Alert summarizes a recent Notification No. SO 1789 (E) [1] dated 5 June 2017 (Notification) issued by Central Government (CG) under Section 10(38) of the Indian Tax Law (ITL). Section 10(38) (Section) of ITL provides that any capital gains arising from transfer of listed equity shares held for a period of more than 12 months is not taxable if the sale is subject to Securities Transaction Tax (STT). It was observed by CG that benefit of exemption was misused for routing of unaccounted money through the medium of capital gains exemption. In order to deal with the menace of routing unaccounted income, Finance Act 2017 amended the Section which seeks to curtail benefit of capital gains exemption. Post amendment, the exemption for the purpose of computation of capital gains will not be available if the shares are acquired on or after 1 October 2004 and such acquisition was not chargeable to STT. However, with an intent to protect the capital gains exemption for genuine acquisitions, CG was empowered to notify the transactions which will continue to be exempt under the Section and not be hit by the amendment. [1] F No. 43/2017/F. No /09/2017/2017-TPL

2 The Notification provides the negative list of transactions in respect of which the benefit of capital gains exemption will not be available under the Section. Alongside the negative list, the Notification also provides carve outs to insulate the genuine acquisitions for which exemption may continue to exist. This Notification is applicable with effect from 1 April 2018 and accordingly shall apply from Tax Year (TY) onwards. Broadly, the Notification provides the following negative list: (a) Acquisition of existing listed [2] equity shares which are not frequently traded [3] on a RSE [4] by way of preferential issue [5]. (b) Acquisition of existing listed equity shares otherwise than through a RSE (c) Acquisition of unlisted equity shares during the period between the delisting and the day immediately preceding the re-listing of such shares on the RSE. Accordingly, para (a) and para (b) deals with acquisition of existing listed equity shares while para (c) deals with acquisition of unlisted equity shares which were listed prior to the acquisition and which would be eventually re-listed on RSE. Further, para (a), para (b) and para (c) of the Notification are mutually exclusive. Background Section 10(38) (Section) of the ITL, interalia, provides that any capital gains arising from transfer of listed equity shares held for a period of more than 12 months is not taxable if the sale is subject to STT. It was observed by the CG that the benefit of exemption was misused for routing of unaccounted money through the medium of capital gains exemption [6]. In order to deal with the menace of routing unaccounted income, Finance Act 2017 amended the Section which seeks to curtail benefit of capital gains exemption. Post amendment, the exemption for the purpose of computation of capital gains will not be available if the shares are acquired on or after 1 October 2004 and such acquisition was not chargeable to STT. However, with an intent to protect the capital gains exemption for genuine acquisitions, the CG was empowered to notify the transactions which will continue to be exempt under the Section and not be hit by the amendment. In this regard, in accordance with the international best practice of consultative approach as in vogue, the Central Board of Direct Taxes (CBDT), vide press release dated 3 April 2017, had issued Draft Notification providing the negative list of transactions for which the benefit of capital gains exemption under the Section will not be granted. The Draft Notification did not provide for any carve-out. The Press Release accompanying the Draft Notification reiterated that amendment was carried out to curb the practice of declaring unaccounted income as exempt long term capital gain by entering into sham transactions. The stakeholders were requested to submit their comments/suggestions on the Draft Notification by 11 April [2] Refer point (ii) under the caption supportive definition [3] Refer point (i) under the caption supportive definition [4] Refer point (vii) under the caption supportive definition [5] Refer point (iii) under the caption supportive definition [6] Explanatory Memorandum to Finance Bill 2017, provided that It has been noticed that exemption provided under section 10(38) is being misused by certain persons for declaring their unaccounted income as exempt long-term capital gains by entering into sham transactions. With a view to prevent this abuse, it is proposed to amend section 10(38) to provide that exemption under this section for income arising on transfer of equity share acquired or on after 1st day of October, 2004 shall be available only if the acquisition of share is chargeable to Securities Transactions Tax under Chapter VII of the Finance (No 2) Act, 2004

3 Post consultation with stakeholders, the CG vide Notification No. SO 1789 (E) [7], has issued final Notification providing the negative list of transactions for which the benefit of capital gains exemption will not be available. Alongside the negative list, the Notification also provides carve-outs to insulate the genuine acquisitions, for which exemption may be continued to be available. This Notification is applicable with effect from 1 April 2018 and accordingly shall apply from Tax Year (TY) onwards. Broadly, the Notification provides the following negative list: (a) Acquisition of existing listed equity shares which are not frequently traded on an RSE by way of preferential issue (b) Acquisition of existing listed equity shares otherwise than through an RSE (c) Acquisition of unlisted equity shares during the period between the delisting and day immediately preceding the re-listing of such shares on RSE. Accordingly, para (a) and para (b) deals with acquisition of existing listed equity shares while para (c) deals with acquisition of unlisted equity shares which were listed prior to the acquisition and which would be eventually relisted on RSE. Further, para (a), para (b) and para (c) of the Notification are mutually exclusive. Refer Annexure for snapshot of the Notification. Para (a) of the Notification - Denial of exemption for acquisition of existing listed equity shares by way of preferential allotment which are not frequently traded on RSE: This Para deals with acquisition of existing listed equity shares which are not frequently traded on RSE and are acquired by way of preferential issue. However, the benefit of exemption may not be denied in respect of above category in following cases where acquisition of preferential issue is: [7] F No. 43/2017/F. No /09/2017/2017-TPL Approved by Supreme Court, High Court, National Company Law Tribunal (NCLT), Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) By non-resident in accordance with foreign direct investment (FDI) guidelines issued by the CG By SEBI registered Investment Fund [8] By specified Venture Capital Fund [9] qualified under the ITL By a Qualified Institutional Buyer [10] Where preferential issue is not governed by Chapter VII of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 Para (b) of the Notification: Denial of exemption of existing listed equity shares acquired outside RSE The scope of para (b) provides for denial of exemption of capital gains for transaction where acquisition of existing listed equity shares is not entered through a RSE. However, the exemption will not be denied in the below cases, which is in accordance with Securities Contract (Regulations) Act, 1956, if applicable, where the acquisition of shares is: By a company other than the preferential issue covered by para (a) of the notification By scheduled banks [11], reconstruction companies [12] or securitisation companies [13] or public financial institutions [14] during the ordinary course of business Approved by Supreme Court, High Court, NCLT, SEBI and RBI Under employee stock option scheme or employee stock purchase scheme framed under SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 By non-resident in accordance with FDI guidelines issued by the CG Under SEBI (Substantial acquisitions of shares and Take overs) Regulations, 2011 From Government By SEBI registered Investment Fund [8] Refer point (xi) under the caption supportive definition [9] Refer point (x) under the caption supportive definition [10] Refer point (iv) under the caption supportive definition [11] Refer point (vi) under the caption supportive definition [12] Refer point (viii) under the caption supportive definition [13] Refer point (ix) under the caption supportive definition [14] Refer point (v) under the caption supportive definition

4 By Venture Capital Fund qualified under the ITL By a Qualified Institutional Buyer By a mode of transfer which are not regarded as transfer for capital gains taxation purpose under the ITL [15], provided that the transferor was eligible for the capital gains exemption under the Section if such shares were sold by the transferor By way of slump purchase of business, provided that, the transferor was eligible for exemption under the Section if such shares were sold by transferor Para (c) of the Notification: Denial of exemption for acquisition of unlisted equity shares during the intervening period in which the company is delisted and subsequently re-listed: Para (c) of the Notification provides that any acquisition of equity shares of a company during the period when such company was delisted from RSE up to the period when the company is relisted on RSE may not be eligible for capital gains exemption at the time of sale. Unlike para (a) and para (b) which are applicable where the acquisition is of existing listed equity shares, para (c) is applicable when the shares acquired are not listed on RSE at the time of acquisition but were listed prior the date of acquisition and which would be eventually re-listed on RSE post date of acquisition. There are no carve out provided for clause (c). The delisting could be either voluntary or compulsory [16]. Comments The Notification issued post consultative process does address many of the concerns of the stakeholders and care has been taken to exempt genuine cases where acquisition is pursuant to Initial Public Offering, Follow-on Public Offering, bonus or rights issue by a listed company or where acquisition is approved by the Court/NCLT/SEBI/RBI. The restrictions in Notification is applicable to shares of a listed company and, in the process, the restrictions protect exemption in respect of shares which are unlisted on the date of issue but are eventually listed. In respect of shares which are regularly traded, the Notification exempts secondary acquisition from Government or acquisitions which are covered by SEBI takeover code or which are pursuant to the tax neutral business reorganisations such as merger/demerger or conversion or as part of slump business acquisition. While the Notification is welcome for its pro-active approach, unintended hardship may be experienced in certain cases where the acquisition is during the period where the shares of the company are delisted irrespective of the reasons for delisting. Also, there may be concerns when acquisition is outside the stock exchange but on account of events such as liquidation, contribution of shares to the firm, dissolution of the firm etc. The exemption in respect of long term capital gains arising from sale of listed shares of an Indian Company is of significant relevance particularly after amendments to Indian treaties with Mauritius, Singapore, and Cyprus. [15] Section 47 of ITL, interalia, includes transfer by way of gift, transfer of asset by holding company to wholly owned subsidiary and vice versa, transfer by way of merger/demerger [16] Refer Rule 21 of Securities Contract (Regulations) Rules, 1957 for reasons of compulsory delisting of company.

5 Supportive definitions: (i) Frequently traded shares means shares of a company, in which the traded turnover on an RSE during the 12 calendar months preceding the calendar month in which the acquisition and transfer is made, is at least 10% of the total number of shares of such class of the company: Provided that where the share capital of a particular class of shares of the company is not identical throughout such period, the weighted average number of total shares of such class of the company shall represent the total number of shares (ii) Listed shares means shares listed in an RSE in India in accordance with the Securities Contracts (Regulation) Act, 1956 and the rules made thereunder. (iii) Preferential issue means an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis and does not include an offer of specified securities made through a public issue, rights issue, bonus issue, employee stock option scheme, employee stock purchase scheme or qualified institutions placement or an issue of sweat equity shares or depository receipts issued in a country outside India or foreign securities; (iv) Qualified Institution Buyer : Refer Section 2(zd) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (v)"public financial institution" shall have the meaning assigned to it in Section 4A of the Companies Act, 1956 (vi) Scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under Section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under Section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934) (vii) Recognised stock exchange means a stock exchange which is for the time being recognized by the CG under section 4 of Securities Contract (Regulations) Act, 1956 (viii)"reconstruction company" means a company formed and registered under the Companies Act, 1956 (1 of 1956) for the purpose of asset reconstruction; (ix)"securitisation company" means any company formed and registered under the Companies Act, 1956 (1 of 1956) for the purpose of securitisation; (x)venture Capital Funds as defined in section 10(23FB) of the ITL (xi) Investment fund" means any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992).

6 Annexure Snapshot of the Notification: Acquisition of equity shares Para (a) and para (b) of the Notification Para (c) of the Notification Acquisition of existing listed equity shares Acquisition of unlisted equity shares which were listed prior to the acquisition and would be re-listed post acquisition Shares are not frequently traded Shares are frequently traded Preferential issue as per SEBI No Yes Acquired through RSE? Yes Protected by proviso to clause (a)? Protected by carve out under proviso to clause (b)? No Yes Yes S. 10(38) capital gains exemption available No S. 10(38) capital gains exemption not available

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