Regulatory Updates: Tax Updates – Exemption on Long Term Capital Gains Tax Arising Out of Transfer of Equity Shares

Exemption on long term capital gains tax arising out of transfer of equity shares which are acquired after 1 October 2004 and are chargeable to Security Transaction Tax (STT) – Section 10(38) of the Income Tax Act 1961.

In view of extending this exemption for genuine transactions where the STT could not have been paid, the Central Government vide its notification dated 5 June 2017, has notified that the condition of chargeability to STT shall not apply to all transactions of acquisitions of equity shares entered into on or after the first day of October,2004 other than the Specified Transactions. This notification shall be effective from 1 April 2018 and shall apply to assessment year 2018-19 and subsequent years.

Gist of Notification dated 5 June 2017

Except the following (Specified Transactions), all transactions of acquisition of equity share entered into on or after the 1st day of October 2004 are not chargeable to securities transaction tax:

a) Acquisition of existing listed equity shares in a company whose equity shares are not frequently traded in a recognised stock exchange of India is made through a preferential issue.

Exceptions to this clause:

Acquisition of listed equity shares in a company:

  1. which are approved by the Supreme Court, High Court, National Company Law Tribunal, Securities and Exchange Board of India or Reserve Bank of India
  2. by any non-resident in compliance with FDI norms;
  3. by an investment fund referred to in section 115UB of the Income tax Act or a venture capital fund referred to in clause (23FB) of section 10 of the Income-tax Act or a Qualified Institutional Buyer;
  4. through preferential issue in compliance with applicable SEBI regulations.

b) Acquisition of existing listed equity share in a company is not entered through a recognised stock exchange of India:

Exceptions to this clause:

  1. acquisition through an issue of share by a company other than the issue referred to in clause (a) above;
  2. acquisition by scheduled banks, reconstruction or securitisation companies or public financial institutions in ordinary course of business;
  3. acquisition under ESOP as per SEBI ESOP/ESOS guidelines;
  4. acquisition by a non-resident in compliance with FDI norms;
  5. where acquisition of shares of company is made under Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 2011;
  6. acquisition from the Government;
  7. acquisition by an investment fund referred to in section 115UB of the Income-tax Act or a venture capital fund referred to in clause (23FB) of section 10 of the income-tax Act or a Qualified Institutional Buyer;
  8. acquisition by mode of transfer referred to in sections 47 or 50B of the Income-tax Act, if the previous owner of such shares has not acquired them by any mode referred to in clause (a) or clause (b) or clause (c) as provided in this notification.

c) Acquisition of equity shares during the period effective date on which Company delisted and as on which the Company again listed on a recognised stock exchange.

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