The Finance Act, 2017 brought about a significant amendment to section 10(38) of the Income-tax Act, 1961 conferring exemption from tax on transfer of securities including shares listed on recognised stock exchanges in India provided securities transactions tax (STT) was paid on it and they had made the grade as long term capital asset at the time of transfer. Exemption in lieu of STT regime kicked in from 1 October 2014.
Following reports of its abuse, the Finance Minister Arun Jaitley vide the above amendment said hereafter the exemption would be on only if STT was also paid on purchase or acquisition of the securities. Since this would introduce unintended hardships in genuine cases, the CBDT has pursuant to the powers delegated to it has exempted the following types of acquisitions from the purview of the straightjacket of denial:
•Securities acquired during IPO, rights and bonus issues at any time i.e. prior to 1 October, 2004 or thereafter because they cannot be subjected to STT by the very nature of their acquisition. Curiously, follow on public offers (FPO) have not been specifically exempted even though they also belong to the same genre---primary market transactions;
•Securities acquired to Tribunal and Court orders as well as on orders being passed by the Reserve Bank of India; and
•Securities borne of approved M&A transactions
Preferential allotments also do not find a place in the list of acquisitions without payment of STT. Yet the inference from the overall reading of the section 10(38) regime including the recent subordinate legislation is preferential allotment too would enjoy long term capital gains (LTCG) exemption on transfer so long as they are actively traded shares because only shares that are not frequently traded on bourses have been put in the doghouse. In other words, if company promoters help themselves to preferential allotment of shares that are infrequently traded on bourses, on such shares arising out of preferential allotment there won’t be any exemption from LTCG even though they might have been held for at least 12 months following such allotment.
However on the shares they got through the normal process i.e. without preference they would get exemption even if they are infrequently traded on the Indian bourses. The further inference therefore is if shares are actively traded shares borne of preferential allotment they would enjoy immunity from LTCG tax even though STT was not paid on them at the time of allotment as indeed it cannot be being a transaction in the primary market. The government would do well to make this explicit without leaving it to inference because ambiguity breeds expensive and prolonged litigation.
Another grey area, curiously once again pertaining to promoters, is inter se transactions between them. Both the NSE and BSE have block deals platforms. Block deals are those where the number of shares changing hands are at least 5 lakh or the selling price is at least Rs 5 crore. Indian promoters have made a killing on family settlements and in the run up to demergers by selling on block deal platforms of the bourses without any tax liability because they make the grade under section 10(38) in letter though not in spirit. This platform is open for 35 minutes before the trading begins for public. Promoters enact a farce by sitting across the table and consummating such block deals through stock exchanges whereas the true nature of such transactions is they are out and out private deals in which public can never participate which listing is all about.
One thought Jaitley would wrench away this wholly unmerited tax exemption to promoters through the block deals platform but he has done no such thing. There are however media reports that under the new regime promoters’ inter se sales would be taxed because such sales do not find reprieve alongside IPO, rights etc. But this seems to be an incorrect reading of the law. Such sales consummated through block deal platforms of the Indian recognised stock exchanges would continue to evade tax. Jaitley would do well to throw clear legal light on this grey area as well.
Updated Date: Jun 08, 2017 11:31 AM