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CBDT issues final notification on securities tax exemption
January, 04th 2019

The Finance Act, 2018, withdrew an exemption under section 10(38) of the Income Tax Act, 1961 (ITA), on long-term capital gains (LTCG) arising from the transfer of listed equity shares or units of an equity oriented fund. The act also introduced section 112A to impose LTCG tax on capital gains exceeding ?100,000 (US$1,500) at the rate of 10%, effective from the 2018-19 financial year.

Section 112A provides that the beneficial rate of 10% LTCG tax will be available only if the requisite securities transaction tax (STT) was paid at both the time of the acquisition and at the time of transfer of the asset. However, section 112A left room for the government to notify certain modes of acquisition where payment of STT would not apply to obtain the 10% beneficial LTCG tax rate.

Six months after issuing a draft notification on the subject, the Central Board of Direct Taxes (CBDT) issued a final notification specifying the modes of acquisition where the STT payment requirement would not be applicable.

The final notification is largely identical to the draft notification and specifies that the STT payment requirement will not apply to: (1) all share acquisitions undertaken prior to 1 October 2004; and (2) all share acquisitions undertaken on or after 1 October 2004, other than: (i) acquisition through preferential allotment of shares that are not frequently traded on a stock exchange (excluding acquisitions that have been approved by the Supreme Court/high court/Securities and Exchange Board of India/Reserve Bank of India (RBI), acquisitions by a non-resident in accordance with foreign direct investment guidelines); (ii) off-market acquisition of listed shares (excluding acquisitions under an employee stock option plans scheme, acquisition of shares approved by the Supreme Court/high court/National Company Law Tribunal/RBI, acquisitions by certain kinds of domestic and international investment funds including category I and category II alternative investment funds, acquisitions through a slump sale, or through a transfer by a person to a firm or other association of persons or body of individuals, or on dissolution of a firm or other association of persons or body of individuals, or through modes not regarded as a transfer under the ITA); and (iii) acquisition of delisted shares.

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