The threat of tax-exempt status of regional stock exchanges being taken away has receded. The income-tax department has now said that equity share investments of such exchanges in a subsidiary promoted by them was not violative of the investment modes prescribed in the income-tax law for continuing as a registered tax-exempt institution.
A number of RSEs have tax-exempt status in view of their registration with the tax department as an approved institution under certain provision of the income-tax law. But the tax-exempt status was under threat in view of the tax provisions hitherto not recognising the equity share investments made by the RSE in a subsidiary.
As part of the revival of regional stock exchanges (RSEs), the Securities and Exchange Board of India (SEBI) had in 1999 allowed stock exchanges in the country to promote subsidiaries so as to acquire membership rights of larger stock exchanges such as the National Stock Exchange (NSE) or Stock Exchange, Mumbai.
Although RSEs conformed to the SEBI guidelines and made share investments in subsidiaries set up by them since 1999, the Income-Tax provisions (Section 11(5) read with rule 17C), as they stood, did not permit such investments.
As the RSEs had complied with the SEBI guidelines, the Central Board of Direct Taxes (CBDT) has now brought about "convergence" between the SEBI guidelines and the income-tax rules from the period commencing from November 26, 1999.
The CBDT has amended the income-tax rules, on a retrospective basis to specify that share investments made by the RSEs in a subsidiary promoted by them would qualify as an eligible investment for such exchanges to retain their tax-exempt status. There are more than 20 regional stock exchanges in the country.