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Pranav Vora, Director - M&A Tax, PwC India


CBDT's final notification brings relief in case of non-STT paid transactions

One of the most notable amendments made to the Income Tax Act, 1961 (the Act), was the introduction of section 112A with effect from 01 April, 2018 (i.e. from AY 2019-20) by the Finance Act, 2018. Prior to the inclusion of section 112A, all long-term capital gains arising on the transfer of listed equity shares or units of equity-oriented mutual funds or units of business trust (Specified Securities), held for a period of more than 12 months were exempt from capital gains tax, subject to payment of Securities Transaction Tax (STT) at the time of transfer of such specified securities.

However, the Finance Act, 2017, through an amendment, introduced additional requirement for STT to be paid at the time of both acquisition and transfer of such specified securities to avail the benefit of exemption under section 10(38). Correspondingly, section 112A provided that all long-term capital gains arising from the alienation of Specified Securities in excess of INR 100,000 shall be subject to income tax at the rate of 10% (plus applicable surcharge and cess). It also contained a rider similar to section 10(38) that STT should have been paid at the time of acquisition as well as transfer of such securities.

However, sub-section (4) to section 112A provides some leeway in notifying certain non-STT paid transactions to be covered under section 112A. In April 2018, the Central Board of Direct Taxes (CBDT) issued a draft notification (Draft Notification), which specified the transactions under the ambit of section 112A despite STT not being paid at the time of acquisition of such equity shares. Subsequently, on 01 October, 2018, the CBDT issued the final notification (Final Notification) in this regard.

The transactions mentioned in the Final Notification are as follows, which is similar to the Draft Notification, except additions of capital contribution in firm/ AOP/ BoI as per section 45(3) of the Act and distribution on dissolution of firm/ AOP/ BoI as per section 45(4) of the Act.

Requirement to pay STT at the time of acquisition of equity shares shall

not apply

1.    Share acquisitions prior to 01 October, 2004

 

2.    Share acquisitions on or after 01 October, 2004 other than the following

a.  Acquisition of existing listed equity shares in a company whose equity shares are not frequently traded on a recognised stock exchange of India through a preferential issue. This clause covers only shares acquired on preferential basis and does not include equity shares acquired under public issue, rights issue, bonus issue, ESOP scheme, etc.

Exclusions to 2(a)

-   Acquisition that has been approved by the Supreme Court (SC), High Court (HC), National Company Law Tribunal (NCLT), Securities and Exchange Board of India (SEBI) or Reserve Bank of India (RBI) in this behalf.

-   Acquisition by any non-resident in accordance with foreign direct investment (FDI) guidelines issued by the Government of India.

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

-   Acquisition through a preferential issue to which provisions of Chapter VII of the ICDR Regulations do not apply. Chapter VII does not apply to preferential allotment made (a) on conversion of loan or convertible debt instruments under the relevant provisions of the Companies Act, 2013; (b) pursuant to a scheme approved by a HC or NCLT; (c) pursuant to a Rehabilitation scheme approved by Board of Industrial and Financial Reconstruction under the Sick Industrial Companies (Special Provisions) Act, 1985 or the Tribunal under the Insolvency and Bankruptcy Code, 2016; (d) to secured lenders pursuant to conversion of their debt into equity shares under the strategic debt restructuring scheme.

b.  Acquisition of existing listed equity shares in a company, not entered through a recognised stock exchange of India (covers only secondary transactions of listed equity shares)

Exclusions to 2(b):

-   Acquisition through issue of share by a company other than the issue referred to in clause (a) above;

-   Acquisition by scheduled banks, reconstruction or securitisation companies or public financial institutions during their ordinary course of business;

-   Acquisition that has been approved by the SC, HC, NCLT, SEBI or RBI in this behalf;

-   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;

-   Acquisition by any non-resident in accordance with FDI guidelines of the Government of India;

-   Acquisition of shares of company under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;

-   Acquisition from the government;

-   Acquisition by a Category I or II AIF or a VCF or a QIB and

-   Acquisition by mode of transfer referred to in section 47 (transactions not regarded as “transfers”) or section 50B (slump sale) or 45(3) (capital contribution in firm/ AOP/ BoI) or 45(4) (distribution on dissolution of firm/ AOP/ BoI) of the Act if the acquisition by the previous owner was not covered above.

c.  Acquisition of equity shares of a company during the intervening period starting from the date on which the company is delisted and ending on the date on which the company is relisted on a recognised stock exchange, in accordance with the Securities Contracts (Regulation) Act, 1956, read with the Securities and Exchange Board of India Act, 1992 and any rules made there under

Acquisition of shares during their de-listing and re-listing on stock exchange (covers both primary and secondary transactions)

 

 

The Final Notification settles several uncertainties and provides much awaited relief to taxpayers in relation to the application of section 112A. However, it is still unclear if grandfathering shall be available for NCLT/ SEBI approved mergers/ de-mergers between two listed companies or of a listed company with an unlisted company after 31 January, 2018.

Although the Final Notification has given the businesses and non-residents a respite in their tax planning, it has not entirely addressed their concerns regarding various off-market transactions, including acquisitions of listed company shares by domestic private equity or domestic investors outside the stock exchange.

 

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Disclaimer: The views expressed in this article are personal. This article includes inputs from Manthan Bavishi - Manager, M&A Tax PwC India and Nehal Thakkar - Associate, M&A Tax PwC India. The publisher or the author disclaim all, and any liability and responsibility, to any person on any action taken on reliance of it


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