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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.