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
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.