What are the tax implications for a UAE-based NRI trading in unlisted Indian shares?

I have been residing in Dubai for the past 10 years and I do full-time global trading of shares and securities. In India, I also trade in unlisted stocks. I have recently purchased and sold some shares of an unlisted Indian company within 2-3 days. The price for purchase and sale was lower than the prices quoted on popular websites which publish such prices. The transaction was done through my NRO account. Would there be any tax implications in India if I have sold and purchased at less than market prices?
-Name withheld on request

Since you have mentioned that you are actively engaged in global trading in shares, it can be assumed that such trading forms part of your regular business activity. Accordingly, the shares acquired by you in India would be regarded as stock-in-trade rather than as investments or capital assets held for long-term appreciation.

Under Indian income tax law, merely acquiring shares of an Indian company does not create an immediate tax obligation. However, there’s an anti-abuse provision that taxes the receipt of certain specified property—either without consideration or for a consideration lower than its fair market value (FMV)—in the hands of the recipient.

If the consideration paid for a property is less than its FMV by more than ₹50,000, the entire difference between the FMV and the actual consideration is treated as income and taxed in India. For this purpose, the term “property” has been defined to include, among other things, capital assets such as shares and securities.

When anti-abuse rules don’t apply

It’s important to note that the definition of a “capital asset” under income tax laws specifically excludes stock-in-trade. Therefore, since the shares you’ve acquired are held as stock-in-trade, they do not qualify as “property” for the purpose of the anti-abuse rule.

As a result, this provision—which taxes the receipt of shares for inadequate consideration—will not apply to your case, even if you purchased them below FMV, provided they are held as stock-in-trade.

Similarly, the fair value norms that apply to the transfer of capital assets will not be triggered for transactions where shares are classified as trading stock.

Double tax relief under DTAA

From an overall perspective, assuming that you qualify as a tax resident of the UAE under the India—UAE Double Taxation Avoidance Agreement (DTAA), and that you do not have a permanent establishment (PE) in India, the business profits from such trading activity in Indian shares would not be taxable in India.

Harshal Bhuta is partner at P. R. Bhuta & Co. CAs