Tax department clarifies that budget proposal to levy capital gains tax on all equity share sales where securities transaction tax has not been paid would apply in three cases

The tax department has proposed to soften an anti-abuse provision in Finance Bill 2017 meant to check money laundering by limiting its scope to only three specified instances of abuse.

A draft notification issued by the department on Monday clarified that a budget proposal to levy long-term capital gains tax (LTCG) on all equity share sales where securities transaction tax (STT) has not been paid would be applicable only in three cases.

These are: sale of listed equity shares in a company done outside a recognized stock exchange; acquisition of listed equities that are not very frequently traded on the stock exchanges through a preferential issue except in cases of court-approved mergers and cases of rehabilitation and debt restructuring; and the acquisition of equity shares in a company that is de-listed.

The proposal gives relief to investors acquiring shares in initial and follow-on public offers and non-residents participating in bonus or rights issues of a listed company, where securities transaction tax is not paid.

While tax experts welcomed the move in general, they fear that one of the three specified instances—sale of listed equity shares in a company done outside a recognized stock exchange—could hit mergers and acquisitions (M&As).

M&As are often done off-market to avoid influencing share prices and could attract capital gains tax as per the draft notification, according to Amit Maheshwari, partner, Ashok Maheshwary and Associates LLP.

The tax department will receive feedback on the draft till 11 April.

Ravi Mehta, partner, Grant Thornton India LLP, said, “On a literal reading, it could encompass both primary as well as secondary transactions, including genuine transactions such as purchase of shares under employee stock options, fresh fund-raising by listed companies from promoters or financial investors during down-turn and genuine off-market purchases such as share acquisition where price also includes control premium.”

In many cases, income tax would have been properly paid by sellers and, hence, there would be no effective revenue loss to the exchequer, added Mehta.

“This (provision) would dissuade acquirers to purchase shares of listed companies through a private transaction/off market. There have been several instances where some of the large acquisition transactions, including by private equity investors, have been undertaken off-market purely for commercial reasons,” said Anil Talreja, Partner, Deloitte Haskins and Sells LLP.

Still, the draft is conceptually appropriate and some of the issues with it should ideally be sorted out in the final notification, said Pranav Sayta, tax partner, EY India.

The anti-abuse provision was introduced in the budget this year after the Supreme Court-appointed special investigation team on black money highlighted the use of penny stocks in money laundering by inflating their price through market manipulation.