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May 2017


CBDT's Draft Notification on exemption from long-term capital gains in respect of certain modes of acquisitions of shares of a listed Company

  1. Background

1.1  Section 10(38) of the Income Tax Act, 1961 up till now has been one of the most attractive provisions for the investor community including employee stock option (“Option”/ “ESOP”) holders of a listed Company in India. This Section seeks to exempt long-term capital gains (“LTCG”) tax arising out of sale of listed equity shares (“Share”) of a listed Company in India, undertaken after October 01, 2004 being chargeable to Securities Transaction Tax (“STT”). The most important criteria for claim of exemption used to be chargeability of STT at the time of sale of Shares. Chargeability of STT at the time of acquisition of such Shares was not relevant for claiming the exemption hitherto.


1.2   However, the Finance Act, 2017 sought to bring an altogether a new requirement by inserting a 3rd Proviso to the aforesaid Section with effect from April 01, 2017. This new Proviso mandates that all modes of acquisition of Shares on which STT is not chargeable at the time of acquisition shall not qualify for exemption, except those modes notified by the Central Government in this regard.

1.3   Accordingly, the Central Government came out with a draft Notification vide Press Release dated April 03, 2017 (“Draft Notification”) seeking public comments on certain modes/ transactions of acquisition of Shares specified therein as being not being chargeable to STT, but would still qualify for exemption under Section 10(38).

1.4  Even though, the said amendment is prompted by noble reasons e.g. as an anti-abuse measure, to avoid tax evasion, etc., there are yet chances of more genuine transactions of acquisition of Shares that may face the trouble if not properly specified in the relevant Notification. Some of such genuine transactions like acquisitions in IPO, FPO, Bonus/ Rights issue, etc. have been spelt by the Central Government itself in the Memorandum explaining the provisions of Finance Act and also in the Press Release stated above. However, there are yet other genuine transactions which need a very clear mention in the relevant Notification.

1.5   Given the background above, by way of this newsletter, we wish to share our understandings and few concerns as well in respect of the Draft Notification from an ESOP perspective. We have also submitted our comments and suggestions to the Finance Ministry on the draft Notification.

  2. Our analysis and views

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