Government planning to roll back long-term capital gains tax on Esops &...

Government planning to roll back long-term capital gains tax on Esops & PEs

long-term capital gains

MUMBAI: People close to the development  have said, the government may be looking to roll back or tweak a Budget announcement, long-term capital gains (LTCG) tax being imposed on  Esops (employee stock ownership plan) and private equity investors holders.

Before October 1, 2004, a provision had been introduced by the government in the Budget whereby anyone who acquired shares in unlisted companies, and had not paid securities transaction tax (STT) will be liable to pay 10% LTCG tax.

Paresh Shah, lead partner ­ Tax & Regulatory , KNAV , said, “Several representations were made by the industry to the government explaining the unintended consequences of long term capital gains tax. The hope is that the said provision to be rolled back entirely, and if not, a clarification be given clearly stating the cases where this provision will be applicable.”

The provision was brought by the Government to plug a loophole being used to evade taxes.

“Several representations were made by the industry to the government explaining the unintended consequences of long-term capital gains tax in unlisted shares,“ Vaibhav Manek, partner, KNAV , an international tax advisory firm, he also said, the provision could be rolled back, and if not, a clarification of where to apply might be given.

Industry trackers have said that not just private equity investors but even receipt of shares under gift, mergers, demergers, bonus issue, rights issue, and also acquisition of shares under IPO (initial public offering) or shares of a company, which was listed after acquisition of shares, will be covered under the definition.

Punit Shah, partner, Dhurva Advisors said, “This provision is specifically proposed to be legislated to prevent abuse of capital gains exemption provisions. Therefore, it is widely expected that all the genuine cases such as Esops, promoters’ holdings of unlisted shares, FDI investments, among others will be notified to be outside the purview of these proposed provisions.”

The government was looking to plug the loophole in thinly-traded or group-z category shares. On January 19 ET had mentioned that the government was looking forward to the introduction of LTCG tax on group-Z category of shares. Companies that have not complied with regulatory requirements fall under the Group-Z category. About 2,200 companies fall under the category on the BSE. The government has been requested by some private equity and venture funds have to exempt them from the 10% tax on their long-term returns.

“The representations are being made to exempt private equity and venture capital players from the above move which was clearly aimed to disqualify sham transactions, not genuine PEVC deals,“ said Tejesh Chitlangi, partner, IC Legal.

However, some experts say the government must roll back the capital gains provision.

Daksha Baxi, executive director, Khaitan & Co  said, “Introduction of the provision that long-term capital gains tax would be exempt only where the shares were acquired after paying STT would thus require the government to provide a long list of exclusions to remove hardship in many genuine cases. And yet, the list may not be exhaustive. A rollback of this provision would be ideal.”

Some of the existing and new regulations will take care of the loopholes experts also say and the provision could completely be done away with. For example, a tax framework applicable from April 1 this year, will encompass and cover loopholes exploited by several businessmen for manipulation.

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