Govt may Roll Back Long-term Cap Gains Tax on Esops & PEs Pro­vi­sion was in­tro­duced in Bud­get to plug a loop­hole that was be­ing used to evade taxes

The Economic Times - - Companies: Pursuit Of Profit -

Sachin Dave & Reena Zachariah

Mumbai: The gov­ern­ment may be look­ing to roll back or tweak a Bud­get an­nounce­ment, im­pos­ing long-term cap­i­tal gains (LTCG) tax on hold­ers of Esops (em­ployee stock own­er­ship plan) and pri­vate eq­uity in­vestors, peo­ple close to the devel­op­ment said.

In the Bud­get, the gov­ern­ment had in­tro­duced a pro­vi­sion whereby any­one who ac­quired shares in un­listed com­pa­nies be­fore Oc­to­ber 1, 2004, and had not paid se­cu­ri­ties trans­ac­tion tax (STT) will be li­able to pay 10% LTCG tax.

“Sev­eral rep­re­sen­ta­tions were made by the in­dus­try to the gov­ern­ment ex­plain­ing the un­in­tended con­se­quences of long term cap­i­tal gains tax. The hope is that the said pro­vi­sion be rolled back en­tirely, and if not, a clar­i­fi­ca­tion be given clearly stat­ing the cases where this pro­vi­sion will be ap­pli­ca­ble,” said Paresh Shah, lead part­ner – Tax & Reg­u­la­tory, KNAV. The gov­ern­ment had brought the pro­vi­sion to plug a loop­hole be­ing used to evade taxes.

“Sev­eral rep­re­sen­ta­tions were made by the in­dus­try to the gov­ern­ment ex­plain­ing the un­in­tended con­se­quences of long-term cap­i­tal gains tax in un­listed shares,” Vaib­hav Manek, part­ner, KNAV, an in­ter­na­tional tax ad­vi­sory firm, said, adding that the pro­vi­sion could be rolled back, and if not, a clar­i­fi­ca­tion might be given stat­ing where it will ap­ply.

In­dus­try track­ers say that not just pri­vate eq­uity in­vestors but even re­ceipt of shares un­der gift, merg­ers, de­merg­ers, bonus is­sue, rights is­sue, acquisition of shares un­der IPO (ini­tial pub­lic of­fer­ing) or shares of a com­pany, which was listed af­ter acquisition of shares, will be cov­ered un­der the def­i­ni­tion.

“This pro­vi­sion is specif­i­cally pro­posed to be leg­is­lated to pre­vent abuse of cap­i­tal gains ex­emp­tion pro­vi­sions. There­fore, it is widely ex­pected that all the gen­uine cases such as Esops, pro­mot­ers’ hold­ings of un­listed shares, FDI in­vest­ments, among oth­ers will be no­ti­fied to be out­side the purview of these pro­posed pro­vi­sions,” said Pu­nit Shah, part­ner, Dhurva Ad­vi­sors.

The gov­ern­ment was look­ing to plug the loop­hole in thinly-traded or group-z cat­e­gory shares. ET had on Jan­uary 19 writ­ten that the gov­ern­ment was look­ing to in­tro­duce LTCG tax on group-Z cat­e­gory of shares. Group-Z is a cat­e­gory made up of listed com­pa­nies that have not com­plied with reg­u­la­tory re­quire­ments. There are about 2,200 com­pa­nies un­der the cat­e­gory on the BSE. Some pri­vate eq­uity and ven­ture funds have re­quested the gov­ern­ment to ex­empt them from the 10% tax on their long-term re­turns.

“The rep­re­sen­ta­tions are be­ing made to ex­empt pri­vate eq­uity and ven­ture cap­i­tal play­ers from the above move which was clearly aimed to dis­qual­ify sham trans­ac­tions, not gen­uine PE/VC deals,” said Te­jesh Chit­langi, part­ner, IC Le­gal. How­ever, there are ex­perts who say the gov­ern­ment must to­tally roll back the cap­i­tal gains pro­vi­sion. “In­tro­duc­tion of the pro­vi­sion that long-term cap­i­tal gains tax would be ex­empt only where the shares were ac­quired af­ter pay­ing STT would thus re­quire the gov­ern­ment to pro­vide a long list of ex­clu­sions to re­move hard­ship in many gen­uine cases. And yet, the list may not be ex­haus­tive. A roll­back of this pro­vi­sion would be ideal,” said Dak­sha Baxi, ex­ec­u­tive direc­tor, Khai­tan & Co.

Ex­perts also say that some of the ex­ist­ing and new reg­u­la­tions will take care of the loop­holes and the pro­vi­sion could com­pletely be done away with. For ex­am­ple, a tax frame­work which is set to be ap­pli­ca­ble from April 1 this year, will en­com­pass and cover loop­holes ex­ploited by sev­eral busi­ness­men for ma­nip­u­la­tion.

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