New Delhi: With the Budget proposing to withdraw long-term capital gains tax exemption if shares were purchased without paying STT, venture capital and private equity investors want clarity from the government to keep their investment in unlisted firms and the ESOPs exempted. While the new provision is mainly aimed at checking misuse of this exemption for tax evasion through ‘sham transactions’ in stock market, it also provides for continued exemption for “genuine cases” where STT could not have been paid like in acquisition of shares in IPOs, FPOs, bonus or rights issue of shares by listed firms by non residents.
However, there is no mention of ESOPs or purchase of shares in unlisted companies by PE or VC investors who typically seek to sell their shares post listing and therefore STT (Securities Transaction Tax) may not have been charged at the time of purchase of shares or grant of ESOPs. The investors and the start-ups, where a trend is prevalent for grant of ESOPs and investment by PEs and VCs much before listing, fear that the proposed amendment to rules governing tax exemptions for long-term capital gains could potentially place an onerous tax burden on such transactions.
Therefore, they want clarity of application of new rules. Currently, the income arising from transfer of long-term capital asset, being equity share of a company or a unit of an equity-oriented fund, is exempt from tax. Eminent chartered accountant S. Ravi said the announcement of allowing LTCG exemption for income arising on transfer of equity shares acquired or on after October 1, 2004 only if the acquisition of shares is chargeable to STT would curb evasion of capital gains via investment in spurious firms.
“It is expected that the Finance Ministry would provide clarifications shortly to exclude genuine transactions such as FDI, ESOPs, IPOS, bonus issues which do not attract STT on acquisition,” said Ravi, who is managing partner of Ravi Rajan & Co and an independent director on the board of public limited companies.
