Friday, 26 February 2016

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 .


No comments:

Post a Comment

Please leave your name and email id along with the comment .
Get the updates from this blog direct to your inbox . Fill in your email id on the home page.