Notification clarifying ‘genuine’ transactions for nil capital gains when no STT is paid

CBDT or Central Board of Direct Taxes recently released a notification that the transactions which under the Section 10(38) of the Income Tax Act of 1961, claim exemption from the condition of changeability, the condition shall now no longer apply. Lets read in detail about the Notification clarifying ‘genuine’ transactions for nil capital gains.

Notification clarifying ‘genuine’ transactions for nil capital gains

Before its amendment, the Section 10(38) of the 1961 Income Tax Act stated some of the terms under which certain transactions shall be exempted. These include the income arising by transferring long-term capital asset, being a company’s equity shares, if the transactions were made after October 1, 2014. These transactions would be chargeable to the STT or the Securities Transaction Tax under the Chapter VII of the 2004 Finance (No.2) Act.

The provisions of Section 10(38) of the Finance Act of 2017 were amended to get rid of the act of declaration of unaccounted income as an exempt from long-term capital gain by the entry into the sham transactions. Now, the income arising from the transfer of equity acquired from October 2004 onwards will be available only in the case where the acquisition of the share is chargeable to the Securities Transaction Tax.

The Central Board of Direct Taxes has also taken steps to protect the exemption of certain genuine cases where it was not possible to pay the STT. In order to do so, it has been provided that the Central Government will be notifying the acquisitions under which the condition for STT’s chargeability will not be applicable.

Keeping in mind the above, the CBDT has taken certain steps. It has notified that the status of STT’s chargeability will not be applicable to all its transactions of the equity shares’ transactions which have been entered from October 2004 onwards.

These do not include those shares of a company which are not regularly traded on any recognized stock exchange, the acquisition of the listed existing equity shares not through any recognized stock exchange of a company during its delisting time. But the CBDT has also taken some steps to protect the genuine investors’ interests and hence for this purpose it has provided certain exceptions in the specified transactions.

Some experts were contacted and asked to comment on the matter. Radhika Jain, the Director of Grant Thornton Advisory Pvt. Ltd said that the final notification focuses on the concerns that were raised by the stakeholders on the issue of the draft which was released earlier in April. It authenticates the transactions that are performed off the market and will not be affected by withdrawing the long-term capital gains exemption.

It also includes the ESOPs and the shares which were issued following the approval of certain regulators including SEBI and RBI. It also exempts the transactions which have been covered in the range of the capital gains exemption under the Section 47, for instance, any gift, or will or an irrevocable trust between holdings or subsidiary companies.

Hence, the amendments introduced by the Finance Act of 2017 in Section 10(38) should not adversely affect the genuine M&A transfers for the purposes of succession planning.