India: Capital gains exemption for listed shares; GST bills roll-out in sight

Rakesh Dharawat	Hariharan Gangadharan	Niraj Bagri

Long term capital gains on the sale of listed equity shares sold on the stock exchange are exempt from capital gains tax. However, the scope of this exemption has been significantly curtailed by the Finance Act 2017.

The law now states that the exemption will not be available to shares acquired after October 1 2004 on which securities transaction tax (STT) – payable in India on the value of securities transacted through a recognised stock exchange – was not chargeable. It is, however, provided that this limitation will not apply to categories of acquisitions notified by the government in this regard.

The stated objective of this amendment was to prevent the misuse of the exemption by persons declaring unaccounted income as exempt long-term capital gains through sham transactions. It was widely felt that the scope of the amendment was unduly wide and that it could lead to a denial of the exemption in several legitimate cases.

On April 4 2017, the Central Board of Direct Taxes released a draft notification for public comment. Under this draft, all transactions involving the acquisition of equity shares entered into on or after October 1 2004 that are not chargeable to STT must be notified to the tax authority. However, there are some exceptions, as follows:

• The acquisition of listed equity shares in a company, whose equity shares are not frequently traded in a recognised stock exchange of India, which are made through a preferential issue;

• Transactions for the purchase of listed equity shares that are not entered through a recognised stock exchange; and

• The acquisition of an equity share of a company during the period between when a company is delisted from a recognised stock exchange and when it is again listed on a recognised stock exchange.

Thus, the capital gains exemption will not be available only in cases where the shares have been acquired in one of the above ways. Although some situations (such as employees acquiring shares through employee stock option trusts, and acquisitions of shares that form part of business acquisitions) are not directly addressed, this draft notification will ensure the continued availability of the capital gains exemption in several cases such as initial public offerings (IPOs), rights issues, bonus issues, etc.

The past few weeks witnessed a lot of progress in the government's resolve to implement the goods and services tax (GST) regime by July 1 2017. With the passage of the bills pertaining to central GST, integrated GST and union territory GST without any amendments in the Rajya Sabha (upper house of parliament), the government has inched a step closer to meet the July 1 deadline targeted for the introduction of the GST. These bills will now be sent for presidential assent. Also, all the respective state legislative assemblies (29 states and two union territories) would now have to pass their state GST bills, preferably by convening a special session.

In the background, the government has also issued nine draft rules covering various aspects such as input tax credit, valuation, and transition, which would provide clarity on many issues for businesses. This also includes the revised rules relating to registration, invoicing, payment, refunds and returns that were issued earlier. These rules have been published for comments from various stakeholders by April 10 2017. Furthermore, the government has also extended the deadline for GST migration from March 31 2017 to April 30 2017 to maximise the number of taxpayers enrolled for the GST regime.

Nonetheless, one major task is still pending before the government: the finalisation of GST rates for each type of good and service. The GST Council has already agreed on a four-tier rate structure of 5%, 12%, 18% and 28% for goods, along with a cess on the rate to be levied on luxury and demerit goods to compensate the states for revenue loss in the first five years of GST implementation. To address this awaiting issue, and to finalise the rates on services, the GST Council is scheduled to meet on May 18-19 and finalise the GST rates, and also to tentatively approve the rules.

Another issue that the entire industry seems to be concerned about is the anti-profiteering clause in the GST Bill. During his speech in the Rajya Sabha on April 6, Finance Minister Arun Jaitley justified the presence of the anti-profiteering clause and stated that the GST Council may consider providing these functions to the Competition Commission of India or creating a separate group to do so to ease the concerns of the industry.

While the government is busy gearing up for the roll-out of GST by July 1, it has to be observed how smoothly the industry transitions into the GST regime given the short span of time with the decision on the fitment of rates still pending the approval of the GST Council.

Rakesh Dharawat (rakesh.dharawat@dhruvaadvisors.com), Hariharan Gangadharan (hariharan.gangadharan@dhruvaadvisors.com) and Niraj Bagri (niraj.bagri@dhruvaadvisors.com)

Dhruva Advisors

Tel: +91 22 6108 1000

Website: www.dhruvaadvisors.com