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Under current norms, any capital gains from shares held for more than a year are fully tax-exempt if securities transaction tax of 0.1% is paid at the time of selling them. Photo: Mint
Under current norms, any capital gains from shares held for more than a year are fully tax-exempt if securities transaction tax of 0.1% is paid at the time of selling them. Photo: Mint

ESOPs exempt from budget proposals on long-term capital gains tax

Budget 2017 proposed to deny LTCG tax exemption on sale of listed securities, if securities transaction tax was not paid at the time of acquiring them

All genuine transactions, including employee stock options, will be exempt from the budget proposals on long-term capital gains tax (LTCG), finance ministry officials said on Monday, seeking to assure investors worried about the implications of this provision.

The budget proposed to deny LTCG tax exemption on the sale of listed securities if securities transaction tax (STT) had not been paid at the time of acquiring them.

This was introduced as a provision to prevent misuse. The tax department estimates that people and firms have shown bogus long-term capital gains amounting to more than Rs80,000 crore over several years; that has prompted it to tighten norms. Under current norms, any capital gain from shares held for more than a year are tax-exempt if STT of 0.1% is paid when they are sold.

Currently, STT is not paid when shares are acquired in off-market transactions such as gifting, issuing employee stock options and selling shares to private equity firms. This has resulted in concerns that such transactions could come under the tax department’s scanner.

The memorandum explaining the tax proposals did mention specific instances where tax would be exempt by government notification. But it was silent on employee stock options. Speaking at a post-budget event organised by the Confederation of Indian Industry, Sushil Chandra, chairman of the Central Board of Direct Taxes, said employee stock options would be a part of the exemption list.

He stressed that the provision was only aimed at clamping down on fake transactions.

To be sure, the list notifying transactions that will be exempt will be put out by the tax department after the finance bill receives Parliament’s nod.

Expressing concern at the implications of the budget provisions, the Indian Private Equity and Venture Capital Association had said that it would take up the matter with the government, especially on the question of venture capitalists exiting after an initial public offering. The association had said it would urge the government to exclude all transactions related to funds registered with the Securities and Exchange Board of India, including domestic venture capital funds and alternative investment funds.

A senior tax department official, requesting anonymity, said the government was aware that genuine transactions would have been impacted by the proposal. “This is the reason we have empowered the tax department in the finance bill to exempt all genuine transactions," he said.

“Shares acquired in amalgamations and demergers and gift of shares from one person to the other also need to be exempted from these provisions," said Amit Singhania, partner at law firm Shardul Amarchand Mangaldas and Co.

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