New Delhi: The Central Board of Direct Taxes (CBDT) on Tuesday notified a series of exemptions to the anti-abuse provision introduced in the Finance Act 2017 to curtail money laundering through securities transactions.
The provision was aimed at preventing the misuse of long-term capital gains (LTCG) tax exemption through such transactions.
Relief given to genuine transactions is based on suggestions received after the CBDT, the apex direct tax policymaking body, brought out a draft notification in April. Tuesday’s announcement says the bona fide acquisition of securities on which the securities transaction tax (STT) is not paid, including employee stock options (ESOPs), foreign direct investment and court-approved transactions, will be exempt from LTCG tax.
Finance minister Arun Jaitley introduced amendments in the Income Tax Act this year to deny the LTCG exemption in all cases where STT is not paid, except the notified ones. The move was prompted by a recommendation by a Supreme Court-appointed special investigation team on black money that had highlighted the use of penny stocks in money laundering by inflating their price through market manipulation.
Tuesday’s notification says that when a listed firm’s shares are acquired outside the stock exchange and STT is not paid, LTCG tax is chargeable, except in cases such as acquisition of ESOPs, acquisitions as part of the government’s disinvestment programme and purchase of shares by non-residents in line with the foreign direct investment policy.
Also, where an off-market transaction is approved by the Supreme Court, the National Company Law Tribunal (NCLT), the Securities and Exchange Board of India (Sebi) or the Reserve Bank of India (RBI), the LTCG exemption is available even if STT is not paid. Investors prefer off-market purchases to avoid influencing the stock market.
The acquisition of shares under Sebi’s takeover code and off-market share purchases by venture capital funds and qualified institutional buyers are also exempt.
The exemptions are significant given the fact that many projects in stressed sectors could opt for bankruptcy proceedings in which lenders will explore various turnaround options including management and ownership change before considering liquidation and sale of physical assets.
The notification said that cases of acquiring infrequently traded listed securities via preferential issues will be subject to LTCG tax. Bona fide cases such as acquisitions made in line with orders by the apex court, NCLT, Sebi and RBI will be exempted. Other exemptions in this category include preferential issue of infrequently traded shares to non-residents, venture capital funds and qualified institutional buyers.
“This notification comes as a breather for foreign investors and venture capital houses as well as shareholders who have acquired shares upon corporate restructuring undertaken vide court-approved schemes on which no STT was paid. A crucial aspect that the final notification covers is granting of exemptions to taxpayers who have received shares in the course of employment (ESOPs)," said Abhishek Goenka, partner and leader, direct tax, PwC.