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Government drops cap gains tax on startup shares held for 2 years
May, 06th 2016

In a fresh boost to startups, the government on Thursday inserted an amendment to the Finance Bill to provide for capital gains tax exemption if shares of an unlisted company were held for more than two years.

Currently, there is no capital gains tax on share transactions in listed companies if those stocks are held for 12 months. But shares of unlisted entities face capital gains tax of 20% even after three years. The tax treatment has been a major area of concern for international investors, several of whom are pumping billions into Indian companies. And, the move is expected to spur M&As.

The amendment was introduced as finance minister Arun Jaitley introduced other ones to the Bill, which was later cleared by the Lok Sabha. Most of the other amendments were in the nature of clarifications. For instance, buyers will have to pay 1% tax on cars which cost over Rs 10 lakh, which will be collected by the seller. This, officials said, was a clarification, although the move is meant to keep a check on the flow of black money in the economy. A similar provision of tax deducted at source had been prescribed for property of over Rs 50 lakh.

Similarly, the government has said that new companies which opt for a lower tax rate of 25% but opt to forego all exemptions cannot go back to a regime with exemptions. Further, limited liability partnership (LLP) firms have also been included in the list of entities eligible for benefits available to startups, including a tax holiday. The government had earlier proposed to provide a tax holiday for three years to the startups, meeting the specified criterion.

The government has also issued several other clarifications including on the taxation of trusts that convert into companies, with those with agricultural income expected to pay tax only once income starts accruing post-conversion. The finance ministry is expected to issue detailed guidelines shortly. The government also clarified that the tax on dividend receipts of over Rs 10 lakh will be paid on receipts from all companies.

Jaitley, however, resisted pressure from the powerful jeweller lobby which had been seeking a rollback of the 1% excise duty, while promising tough actions against black money. The FM said the government will act tough against those found to be holding illegal offshore accounts as revealed in the Panama Papers leak under the recently passed stringent black money law. In his hour-long reply, he dwelt at length on the challenges facing the Indian economy and said the government will work to resolve the NPA problem of banks. While he promised action against those passing off income from other sources as farm income, he ruled out taxing agricultural earnings. "There are two categories. One is honest agricultural income. You may have a large income which is a separate case. That is a rare case. But there are some cases where people are passing off income from other sources as agriculture income. That is a case of evasion. That will be dealt with under the law. That the assessing officer can deal with," he said.

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