Prior to amendments in The Finance Act 2017 U/S 10(38), income arising from sale of long term capital asset being equity shares of a company shall be exempt if the transaction has place taken after October 1st, 2004 and Securities Transaction Tax (STT) is paid at the time of sale. Under this section, it was not necessary if at the time of purchase of shares, STT was paid on it or not and thus, it opens many avenues for tax planning for many consultants.
Amendment to Section 10(38)- Payment of Securities Transaction Tax not essential for Capital gains on sale of Shares to be exempt
After the amendment in section 10(38) in The Finance Act 2017, the above mentioned exemption is available only if at the time of acquisition of shares, STT was paid. Before this amendment, section 10(38) was widely used by many people to convert their black money as exempted capital gain from sale of shares. But the amendment also started affecting certain genuine transactions and that is why the government needed to notify certain transactions for which the condition of changeability of Securities Transaction Tax (STT) at the time of acquisition shall not apply.
CBDT vide press release dated April 3, 2017 issued Draft notification to give certain genuine transaction benefit of section 10(38). Instead of providing the exhaustive list of transactions for which the condition of STT being paid at the time of acquisition is not required, the government notified a negative list as under which the exemption is not applicable if no Securities Transaction Tax (STT) was paid at the time of acquisition.
Following are the specified transactions which are not exempt from amendment under section 10(38) and STT needs to be levied on these:
- The exemption will not be applicable if the shares of a listed company are not purchased through the recognized stock exchange
- The exemption is not applicable if the shares are purchased after the date of company being de-listed from the stock exchange or before the date of company being re-listed on the stock exchange in accordance with Securities Contracts (Regulation) Act, 1956
- If the shares are allotted/acquired through the preferential allotment of listed equity shares of the company whose shares are not frequently traded on the stock exchange.
However if provision of Chapter VII of Securities and Exchange Board of India (issue of capital and disclosure requirement) Regulation 2009 i.e. the SEBI ICDR Regulations are not applicable on the preferential issues then exemption will be applicable.
Following are the transactions on which exemptions are available and which are not covered under VII of SEBI Regulations 2009
- Issue of equity shares made in pursuant to conversion of loan option attached to convertible debt instrument
- Issue of equity shares pursuant to scheme approved by High Court or Tribunal under Companies Act 2013
- Issue of equity shares in terms of rehabilitation scheme approved by Board of Industrial and Financial Reconstruction (BIFR) under Sick Industrial Companies Act 1985 or the Tribunal under the Insolvency and Bankruptcy Code 2016
The draft provided the definition of frequently traded securities as the shares of the company in which traded turnover on the stock exchange during the twelve calendar preceding months is at least ten percent of the total number of shares of such class of company.
Impact of the amendment to section 10(38) on Capital Gains on sale of Shares
- Exemption will not be available if no STT paid on the purchase of shares of a thinly traded listed company/whose traded turnover during the last 12 months are very low
- Point (b) says that the exemption will not be applicable if the shares are not purchased through recognised stock exchange this points is so wide that it covers genuine off market transactions such as
- Acquisition of shares by strategic investors and private investors
- Transaction involving transfer of promoter shares
- Acquisition of shares by gift or inheritance
- Acquisition of shares by employees in pursuant to ESOP etc.
It is hoped that further clarification and changes will be made to draft notification by CBDT after the comments and suggestions by various stake holders on the same.