‘Anti-Abuse Mea­sure’

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Rev­enue sec­re­tary Has­mukh Ad­hia sought to al­lay con­cerns re­gard­ing the mea­sure. “We will come out with de­tailed rules to ex­clude gen­uine in­vest­ments such as those made through ini­tial pub­lic of­fer, for­eign direct in­vest­ment, Esops (em­ployee stock op­tions),” he said. The mea­sures were aimed at pre­vent­ing eva­sion of cap­i­tal gains via in­vest­ment in bo­gus com­pa­nies. Pend­ing the clar­i­fi­ca­tion, there is trep­i­da­tion that a po­tent in­cen­tive that has helped fuel In­dia’s startup econ­omy could be un­der­mined.

“An un­in­tended con­se­quence of this rule is to po­ten­tially place an oner­ous tax bur­den on Esops — which rep­re­sent the most pow­er­ful wealth-cre­ation in­stru­ment that cash-strapped star­tup­suse­to­mo­ti­va­teem­ploy­ees,” said Gopal Srini­vasan, chair­man of the In­dia Ven­ture Cap­i­tal As­so­ci­a­tion (IVCA).

The lobby group plans to pur­suethe­mat­ter­with­them­i­nistry, said Srini­vasan. Fund man­agers are await­ing further clar­i­fi­ca­tion on whether the rules will ap­ply across the board. Some ex­perts said the move wasn’t overly harsh. “This would largely im­pact all eq­uity trans­ac­tions, par­tic­u­larly pri­vate eq­uity, which took place af­ter 2004,” said Shailesh Harib­hakti, founder, Baker Tilly DHC. “In any case, 10% is a rea­son­able rate com­pared with nor­mal long-term cap­i­tal gains rate. In­dex­a­tion will be ap­pli­ca­ble from 2001.”

Har­ish HV, head of pri­vate eq­uity ad­vi­sory ser­vices at global con­sult­ing firm Grant Thorn­ton, said, “This is a huge blow to the PE in­vestors who have been bat­tling cur­rency de­pre­ci­a­tion and slow­ing busi­nesses.” Such a pro­vi­sion may get drawn into le­gal dis­putes, ex­perts ar­gued.

Pu­nit Shah, part­ner, Dhruva Ad­vi­sors, said the new rules will ap­ply to all do­mes­tic in­vestors, in­clud­ing pro­mot­ers of un­listed In­dian firms. “They would ac­quire shares ei­ther by sub­scrip­tion or in the form of any group re­struc­tur­ing and would not pay STT at the time of ac­qui­si­tion. But now they may have to pay long-term cap­i­tal gains tax on exit even af­ter list­ing of such shares,” he said.

Some of the coun­try’s most valu­able star­tups — Flip­kart, Ola, Snapdeal as well as uni­corns like Zo­mato and Quikr — would­have5-10%of theire­quity bases re­served for Esops.

An­other an­nounce­ment, hid­den in the fine print, is the aim to col­lect more tax if shares of an un­listed com­pany are sold be­low fair value. This may im­pact pri­vate eq­uity in­vestors who of­ten sell stocks of closely held com­pa­nies to other fi­nan­cial in­vestors. For in­stance, if a share pur­chased at ₹ 100 is sold for ₹ 150, the 20% tax on longterm cap­i­tal gains would be ₹ 10 a share. But not if the tax­man thinks that the fair value of the share is higher than ₹ 150 — say, ₹ 170. Here, the tax would be 20% on ₹ 70 (and not ₹ 50), thus raising the tax outgo to ₹ 14 (in­stead of ₹ 10) a share.

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