Ranbaxy promoters may duck capital gains tax, pay STT
June, 13th 2008
The nearly Rs 10,000-crore consideration Ranbaxy promoters are to receive for their stake sale in the company to Daiichi Sankyo of Japan is likely to escape capital gains tax.
According to sources, the transaction is expected to be routed through the stock exchanges in the form of bulk deals and would only invite the nominal securities transactions tax (STT) of 0.125%. The transaction would also draw other small costs, such as brokers fee and 12.5% service tax.
However, according to tax experts, the exact tax liability would depend on who is selling and how. Typically, promoter holding in Indian companies is through a maze of holding and investment companies. If a holding or investment company is selling the stake then the tax treatment would be different.
The sale consideration would be taxed in the hands of the such holding or investment company depending on how it is classified, regular income or non-business income. Only in the case when the entire stake sale is routed through the stock exchanges and constitutes individuals selling their stake then the tax liability is likely would about Rs 12.5 crore, the STT on the deal.
Equity transfer in companies attracts capital gains tax, long-term or short-term, depending on the time shares were held for - short term if held for less than one year. However, in the case of listed companies if the transaction is routed through a recognised stock exchange, then any long-term gain would be exempt under Section 10 (38) of Income Tax Act. Instead, it would attract a securities transactions tax.
It makes sense for them to route the transaction through the stock exchange. Doing it off the stock exchange would invite long-term capital gains tax at 10%. With indexation cost, this would be 20%. On top of that, a surcharge of 10% on the capital gains tax and education cess will be applied. Considering the face value of Ranbaxy share at Rs 5, the cost of acquisition for promoters is negligible and would have to pay capital gains tax on almost the entire amount, if they opt for that, said Ranjit Kapadia, head of equity research, Prabhudas Lilladher.
Such transactions are typically carried out through a series of large bulk deals on the dedicated window for such deals on the stock exchanges. Other shareholders in the company who subscribe to the open offer would however have to pay a capital gains depending on their period holding. The share tendered by them are through the merchant banker and are considered direct sale and therefore attract capital gains tax.