Budget 2017 brought some significant changes in the long-term capital gains tax. Till the announcement of Budget, there were speculations that the Government may withdraw some exemptions given to the long-term capital gains.
However, the Budget had not disappointed the investors as expected. But there are some bad news for the investors in shares since there are a few changes in the law of capital gains tax which may have an adverse impact on STTs and ESOPs.
The Finance Bill, 2017 proposes amendment tos. 10 as “any income arising from the transfer of a long-term capital asset, being an equity share in a company shall not be exempted, if the transaction of acquisition, other than the acquisition notified by the Central Government in this behalf, of such equity share is entered into on or after the 1st day of October, 2004 and such transaction is not chargeable to securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004”.
Experts worries that the amendment may adversely affect the investors and entrepreneurs. The change would have affect the STTs and ESOPs very much. At present, since long-term capital gains exemption is available only if Securities Transaction Tax (STT) has been paid both at time of acquisition and divestment.The amendment would also have an adverse effect on shares granted via employee stock option plans (ESOPs).
A news report by wire agency PTI suggests Budget 2017 introduced this new provision ‘to clamp down on tax evasion through “sham transactions” in the stock market’.
The PTI report also says that ‘to protect the exemption for genuine cases where the STT could not have been paid, like acquisition of share in IPO, FPO, bonus or right issue by a listed company acquisition by non-resident, it has been proposed “to notify transfers for which the condition of chargeability to STT on acquisition would not be applicable”.
Budget 2017 delivered a long term capital gains tax googly, but not the one expected.
In December 2016, Prime Minister NarendraModi, at an event hosted by market regulator Securities and Exchange Board of India (SEBI), suggested that market participants did not pay their fair share of taxes.
“Low or zero tax rate is given to certain types of financial income. We should consider methods for increasing it in a fair, efficient and transparent way, he added, sparking fears that the government may withdraw the exemption on long term capital gains tax applicable on the sale of listed equity shares on a stock exchange.
The next day Finance Minister Arun Jaitley clarified there was no change in the offing, claiming the prime minister’s comments had been misunderstood.
But for equity investors who stood to lose an important tax break, the fear persisted. Until February 1, when Union Budget 2017 was presented and it proposed no such change or withdrawal of the long-term capital gains tax exemption.
But this story doesn’t end there, as another change in the long-term capital gains tax provision has puzzled investors and entrepreneurs.
The Finance Bill, 2017 proposes to amend the Income Tax Act, 1961, Section 10 to provide that “any income arising from the transfer of a long-term capital asset, being an equity share in a company shall not be exempted, if the transaction of acquisition, other than the acquisition notified by the Central Government in this behalf, of such equity share is entered into on or after the 1st day of October, 2004 and such transaction is not chargeable to securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004”.
