Friday, 13 May 2016

Govt drops cap gains tax on startup shares held for 2 yrs

In a fresh boost to startups, the government on Thursday inserted an amendment to the Finance Bill to provide for capital gains tax exemption if shares of an unlisted company were held for more than two years.

Currently, there is no capital gains tax on share transactions in listed companies if those stocks are held for 12 months. But shares of unlisted entities face capital gains tax of 20% even after three years. The tax treatment has been a major area of concern for international investors, several of whom are pumping billions into Indian companies. And, the move is expected to spur M&As.

The amendment was introduced as finance minister Arun Jaitley introduced other ones to the Bill, which was later cleared by the Lok Sabha. Most of the other amendments were in the nature of clarifications. For instance, buyers will have to pay 1% tax on cars which cost over Rs 10 lakh, which will be collected by the seller. This, officials said, was a clarification, although the move is meant to keep a check on the flow of black money in the economy. A similar provision of tax deducted at source had been prescribed for property of over Rs 50 lakh.

Similarly, the government has said that new companies which opt for a lower tax rate of 25% but opt to forego all exemptions cannot go back to a regime with exemptions. Further, limited liability partnership (LLP) firms have also been included in the list of entities eligible for benefits available to startups, including a tax holiday. The government had earlier proposed to provide a tax holiday for three years to the startups, meeting the specified criterion.

The government has also issued several other clarifications including on the taxation of trusts that convert into companies, with those with agricultural income expected to pay tax only once income starts accruing post-conversion. The finance ministry is expected to issue detailed guidelines shortly. The government also clarified that the tax on dividend receipts of over Rs 10 lakh will be paid on receipts from all companies.

Jaitley, however, resisted pressure from the powerful jeweller lobby which had been seeking a rollback of the 1% excise duty, while promising tough actions against black money. The FM said the government will act tough against those found to be holding illegal offshore accounts as revealed in the Panama Papers leak under the recently passed stringent black money law. In his hour-long reply, he dwelt at length on the challenges facing the Indian economy and said the government will work to resolve the NPA problem of banks. While he promised action against those passing off income from other sources as farm income, he ruled out taxing agricultural earnings. "There are two categories. One is honest agricultural income. You may have a large income which is a separate case. That is a rare case. But there are some cases where people are passing off income from other sources as agriculture income. That is a case of evasion. That will be dealt with under the law. That the assessing officer can deal with," he said.

          New tax treatment of sale of unlisted shares brings more certainty, less litigation

          As per Income Tax Law, Income earned from Sale of shares could be held as either Business Income or capital gains depending upon the facts of the case which had led to a lot of litigation over the years. The disputes persisted as assesses were finding it difficult to prove the intent of acquiring these shares.
          In order to avoid disputes and take a consistent view in assessments of such income, CBDT has decided that income arising from transfer of unlisted shares would be considered under the head ‘Capital Gain’. It may be noted that a similar instruction had earlier been issued by CBDT regarding tax treatment of investment in listed shares but this instruction for unlisted companies is more beneficial as the requirement of period of holding has also been dispensed with.
          It is however, clarified that this would not be necessarily applied in 3 situations where:
          i. The genuineness of transactions in unlisted shares itself is questionable; or
          ii. The transfer of unlisted shares is related to an issue pertaining to lifting of corporate veil; or
          iii. The transfer of unlisted shares is made along with the control and management of underlying business and the Assessing Officer would take appropriate view in such situations.
          How would this move benefit
          This is certainly a welcome move for the taxpayer as capital gains are charged at a lesser rate than business income. By taking away the discretion with Assessing Officer, all disputes would be put to rest.
          By putting restrictions on bogus transactions and also where the control and management of the underlying business is also taking place, CBDT has not allowed blanket application of this instruction and Assessing Officer has the liberty to decide on these three situations based on facts of the case.
          This move would also benefit Angel Funds and Private Equity Funds and other investors as they would have certainty in the quantum of tax upon exit and many of those would also get benefit from favorable treaty jurisdictions like Mauritius or Singapore.
          With so much frivolous litigation in tax matters, such steps from Income Tax authorities are surely welcome.

          Government reviews operations of Hindustan Copper and MSTC Ltd

          A meeting of the Parliamentary Consultative Committee attached to the Ministry of Steel and Mines was held in New Delhi on 10-5-2016 for reviewing the functioning of HCL and MSTC Ltd. Presided over by the Minister of Steel and Mines Shri Narendra Singh tomar, the meeting reviewed the progress achieved in the field of Copper by the Hindustan Copper Limited HCL and the challenges and opportunities in Copper Sector in India. The meeting also reviewed the functioning of the revamped MSTC limited and its role in the E-Auctioning and E-Tendering processes in the Government and Public Sector Organisations. The Union Steel & Mines Minister Shri Narendra Singh Tomar chairing the meeting said that the two organizations have shown a high growth in their respective fields and are contributing hugely in the "Make in India" and "Digital India" programmes oh the NDA government. There is a huge potential for both these organisations to make more contribution towards growth in the country.