Skip to main content

Simplicity of tax breaks for long-term gains from shares


Long-term capital gains on sale of listed shares has now been exempt from tax for more than 10 years, since it was implemented in October 2004. The exemption applies in cases where the Securities Transaction Tax (STT) has been paid, and therefore effectively applies to all transactions of sale of listed shares on a recognised stock exchange. In recent years, the scope of the exemption has been effectively extended to a couple of more types of transactions, not by amending the provision governing the exemption, but by bringing the transactions within the net of STT.
One such type of transaction is the public offer for sale of shares. A public offer could be of two types (or a combination of these two)—one, an offer where the company issues shares to the public by allotting new shares, and second, an offer made by the existing shareholders of the company (which may be promoters, venture capital funds, private equity funds, or others) to the public of existing shares held by them in the company.
Till June 2012, such an offer for sale by existing shareholders to the public did not attract STT, and the transfer of shares by the existing shareholders to the public gave rise to taxable capital gains. Such transactions of sale of unlisted equity shares under an offer for sale to the public in an initial public offer, where the shares are subsequently listed on a recognised stock exchange, have been made subject to STT with effect from 1 July 2012. Therefore, such transfer by the existing shareholders is now exempt from long-term capital gains tax, if the shares are long-term capital assets on the date of sale. This exemption is available even though the shares which are being transferred are unlisted at the time of sale, since they get listed only a few days after the allotment under the public offer is completed.
Interestingly, since the shares being offered are unlisted shares at the time of sale, the holding period in order to qualify as long-term capital assets would be a period of more than 36 months, and not 12 months as applicable to listed shares. Therefore, if the shares that are being transferred by the existing shareholders have not been held by them for more than 36 months, the long-term capital gains arising on such transfer would not be exempt, but would be subjected to a concessional rate of tax applicable to short-term capital gains at 15%. It is only if these shares have been held for more than 36 months that the gains would be long-term capital gains, which would be exempt from tax.
Another interesting aspect is that STT applies only to shares being offered under an initial public offer, as defined under the relevant regulations of the Securities and Exchange Board of India (Sebi). It would not apply to a follow-on public offer, which is different from an initial public offer (IPO). An IPO is the first public offer made by a company to list its shares. A subsequent public offer made by the company to offer more shares to the public is a follow-on public offer. It is possible that the existing shareholders, such as promoters or funds, may offer some of their shares even in a follow-on public offer, in which case, though the shares that are being transferred are listed shares, the gains arising on the transfer of such shares would not qualify for exemption of long-term capital gains, but would be subjected to tax at the concessional tax rate of 10% without cost indexation.
The second type of transaction, which now qualifies to be long-term capital gains for the exemption with effect from July 2015, is the tender offer for acquisition of shares under takeovers, buybacks and delisting. Earlier, such an offer could be effected by the acquiring shareholder or company by making an offer to other shareholders to purchase their shares through an open offer under which the shareholders tendered their shares to the acquirer or company, and received the sale proceeds directly from the acquirer or company.
Sebi has amended the rules for such offers from 1 July 2015, whereby the offers can be made through the stock exchange mechanism as an alternative to the existing procedure. Instead of the direct tendering of shares, the shares have to be offered through a broker, who issues a contract note for sale to the tendering shareholder after the acceptance of the offer is completed by the offeror or company. STT is, therefore, charged on such transaction. Since the sale transaction is subject to STT, the shareholder gets the benefit of long-term capital gains exemption or concessional rate of tax of 15% for short-term capital gains, as the case may be.
The scheme of charging of STT and simultaneous exemption or concessional taxation of capital gains has certainly benefited most public shareholders, given the simplicity of the exemption. It has freed shareholders from the hassle of keeping detailed and accurate records and documents regarding date of acquisition and cost of shares. One hopes that the rumours of likely extension of the period of holding of listed shares to qualify as long-term capital assets to 36 months do not become a reality, as that will increase the problems of record-keeping for shareholders, though it may serve the government’s purpose of ensuring that only long-term investors get the benefit, and not all investors.

Sandip Ginodia , Director
We deal in over 60 unlisted companies with 15 years of experience .
For latest prices visit : www.abhisheksecurities.com/unlisted.htm / call : 09830271248 .


Comments

Popular posts from this blog

TCS merger with TCS e serve

The board of Tata Consultancy Services (TCS) in its meeting on 18 October 2012 has approved the composite scheme of arrangement between TCS, TCS e-Serve (e-Serve) and TCS e-Serve International (TEIL). The composite scheme of arrangement provides for merger of e-Serve into TCS and demerger of TEIL's special economic zone (SEZ) undertaking(s) to TCS. The appointed date proposed for this scheme is 01 April 2013. TCS holds 96.26% of the paid up equity share capital of e-Serve. TEIL is a wholly owned subsidiary of e-Serve. As per the terms of the scheme of arrangement, shareholders of e-Serve (other than TCS) will receive 13 equity shares of Re 1 each of TCS for every 4 equity shares of Rs 10 each of e-Serve held by them. The board has approved the scheme of merger of Computational Research Laboratories (CRL) and Retail FullServe (RFL) with TCS. The proposed appointed date for the merger of CRL is 01 October 2012 and for the merger of RFL is 01 April 2012. Computational Res

Stock broker SMC Global files for IPO

F inancial services company SMC Global Securities has filed draft red herring prospectus with SEBI for public issue of 1,58,67,380 equity shares of face value of Rs 2 each. The issue comprises a fresh issue of 79,33,690 equity shares by the company and an offer for sale of 79,33,690 shares by Millennium India Acquisition Company Inc. As of September 30, 2012, "We service our broking clients through a network of 43 branches and 2,521 registered sub-brokers and authorized persons spread in more than 500 cities and towns. We have also established an office in Dubai for brokerage and trading activities in that region," the company said. SMC has reported a loss of Rs 0.42 crore and total revenues of Rs 292.24 crore in the year ended March 31, 2012. "The proceeds of the fresh issue shall be utilised for margin maintenance with stock exchanges; part repayment of term loan; investments into subsidiary, SMC Comtrade; and general corporate purposes," according to p

Zomato, Swiggy score 1/10 on working conditions for their workers – ET Retail

Some of India's biggest startups have ranked near the bottom when it comes to  working conditions  for their gig  workers , according to a report released Wednesday. While  Swiggy ,  Zomato  and Uber India scored 1/10, Urban Company and Flipkart’s logistics arm EKart scored the highest 8/10 and 7/10, respectively, ‘ Fairwork India Ratings  2020: Labour Standards in the Platform Economy’  showed . The report assessed the companies on five principles: fair play, fair conditions, fair contracts, fair management, and fair representation. Deepinder Goyal, chief executive officer of Zomato Media Pvt. Ltd., acknowledged the ratings on Twitter. “Zomato ranked at the bottom of 2020 Fairwork India scores. We knew we had things to work on, but we didn’t know that there is so much room for improvement.” The company takes full responsibility and “will leave no stone unturned to perform better in the rankings next year,” he added. Zomato received a 4/10 in last year's report. According t