SKP Tax Alert
30 April 2018
The government notifies share transactions on which payment of STT is not required at the time of acquisition of equity shares for the purpose of Section 112A

The Finance Act, 2018 has introduced a new section 112A in the Income Tax Act, 1961 (the Act) which provides for taxation of long-term capital gains arising from transfer of a long-term capital asset being listed equity shares or equity oriented mutual fund or a unit of a business trust at the rate of 10%, if such capital gains exceeds INR 100,000.

As per the Section, the concessional rate of 10% can be availed only if Securities Transaction Tax (STT) has been paid on both the acquisition and transfer of equity shares/equity oriented mutual fund/unit of business trust.

There could have been many situations of acquisition where STT might not have been paid. For example, if the shares were acquired before 2004, then STT would not have been paid because the provision for payment of STT was introduced in 2004. To protect the genuine cases, Section 112A provided enabling provision by way of sub Section (4) which empowers the government to notify the nature of acquisitions where payment of STT may not be mandatory.

In light of the above, the government has issued a draft notification vide press release dated 24 April 2018[1], wherein it has specified the nature of acquisitions in respect of which payment of STT is not mandatory. They are as follows:
  • The said draft notification provides that the requirement of payment of STT is not applicable for all transaction entered before 1 October 2004 (i.e., transactions prior to the introduction of STT by the Finance Act, 2004).
  • In respect of transactions entered on or after 1 October 2004 which are not chargeable to STT, except for the following transactions:
Transaction Type Exemption from payment of STT in following cases
Acquisition of existing listed equity share in a company whose equity shares are not frequently traded on a Recognized Stock Exchange (RSE) in India through a preferential issue. Acquisition of listed equity shares:
  • Approved by the Supreme Court, High Court, National Company Law Tribunal (NCLT), Securities Exchange Board of India (SEBI) or Reserve Bank of India (RBI);
  • By any non-resident under Foreign Direct Investment (FDI) guidelines issued by the Government of India;
  • Recognized fund, venture capital fund or Qualified Institutional Buyer (QIB);
  • Preferential issue to which the provisions of Chapter VII of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 do not apply.
Acquisition of existing listed equity share in a company not entered through a RSE of India Acquisition of listed equity shares:
  • By a company through an issue other than preferential issue (e.g., bonus shares);
  • By scheduled banks, reconstruction or securitization companies or public financial institutions during their ordinary course of business;
  • Approved by the Supreme Court, High Court, NCLT, SEBI or RBI;
  • Under employee stock option scheme or employee stock purchase scheme framed under SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;
  • By any non-resident under FDI guidelines issued by the Government of India;
  • Under SEBI (Substantial Acquisition of Shares and Takeovers), Regulations, 2011;
  • From the government;
  • By a recognized investment/venture capital fund or QIB;
  • By modes considered non-taxable transfer under the Act (like an eligible gift, transactions between subsidiary and holding companies, amalgamation, merger, demerger, slump sale, etc.) provided the original owner did not acquire the shares in the modes prohibited in (1) and (2) above.
Acquisition of equity share of a company during the period it has been delisted from a RSE till the day immediately preceding to its re-listing on a RSE. No exemption provided.
SKP's comments
This notification is in line with the notification dated 5 June 2017 issued earlier in respect of Section 10(38) of the Act for providing long-term capital gains exemption for shares on which STT was not paid.

On expected lines, this notification rightly covers cases of investment made under FDI policy, IPOs, ESOPs, etc. However, it would be pertinent to note that transaction like inter-transfer between promoter groups, strategic acquisitions by private investors, etc. is not covered. It appears that private acquisition by non-residents under FDI regulations may be better placed vis-à-vis Indian private investors.

The notification issued is a draft notification which is open for comments from stakeholders.
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