Tax Collection At Source: New Rules Cause Anxiety Among PEs, Investors Of Unlisted Shares

 

Private equity funds that mostly own unlisted shares of entities, fear that the recent government clarification on tax collection at source may end up increasing costs for them and for owners of unlisted shares. Worth mentioning here is that from October 1, the government had introduced a TCS of 0.1% on sale of goods worth Rs 50 lakh and above. This has now led to fears that the TCS will continue to apply on unlisted shares and pre-IPO allotments, the Economic Times mentioned in a report citing people dealing with the matter.

Before the clarification the industry was of the view that TCS was not applicable for shares. 

“This is virtually like STT (Securities Transactional Tax) for unlisted shares and is disadvantageous for big-ticket institutions,” the publication quoted associate vice-president of an American PE fund as saying who spoke on condition of anonymity. “However, we are still hopeful that the law isn’t intended for sale of shares and the government will clarify accordingly.”

If TCS is applicable for shares, then not just PE funds, the law will impact all transactions of over Rs 50 lakh in unlisted shares such as share sale by promoters of an unlisted company.  

The publication citing tax experts mentioned that even the investors who tender their shares through IPO could also be covered under the TCS since at the time of IPO allotment, the company’s shares are still unlisted. The TCS will be a part of the income tax payable by the investors. But most institutional investors like PEs don’t have any income tax liability as such – instead they pay capital gains tax based on their share transactions. In such a scenario, the PE will have to seek a refund from the tax department, thereby locking the money for more than a year. 

“The circular has raised anxieties because listed securities have been specifically exempted from TCS,” Rajesh Gandhi, partner, Deloitte told the business daily. “Shares and other securities have been considered as goods under certain laws and so it would be better if the government clarifies the intent to levy TCS on sale of unlisted shares and securities.”

Tax experts say different laws have different interpretations of what are goods. For instance, the Sale of Goods Act includes even shares under the definition of goods. But the GST law, which has superseded all indirect tax laws, doesn’t consider shares as goods.

Sandip Ginodia , CEO

ALTIUS INVESTECH PVT LTD

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