February 17, 2017by Ms. Mohini Varshenya0

The Finance Minister, Mr. Arun Jaitley, announced the Budget for 2017-18 on 1st of February, 2017. Under the Annexure III to Part B of Budget Speech, certain Additional Revenue Mobilisation (ARM) and Anti-abuse Measures in the area of Direct Taxes were announced. This included the proposal to restrict the exemption from long term capital gains in case of transfer of listed shares by providing that the exemption, subject to notification of certain exceptions, shall be available if security transaction tax has been paid at the time of acquisition of such shares where they have been acquired after 1st October, 2004.

The present provision in this regard is, Section 10(38) of the Income Tax Act exempts the long term capital gains arising in case of transfer of equity shares on or after 01-10-2004, where such transaction is chargeable to securities transaction tax (STT). However this provision has been modified in the latest budget and it is now proposed to levy tax on transfer of listed shares if the STT is not paid at the time of acquisition of such shares.

While certain allotments like IPOs, FPOs, Bonus or Rights Issues, acquisition by Non-Resident under FDI Policy etc. have been clearly excluded from applicability of the aforesaid provision on the grounds that in these cases STT cannot be paid at the time of acquisition of shares. However there are many more types of allotments of equity shares where the payment of STT cannot be made at the time of acquisition of shares. These include Private Placements, Employee Stock Options, conversion of convertible securities etc. Taking the example of ESOPs, wherein Employees are given a right to obtain the equity shares of the company at a pre-determined price and the employees can acquire shares of the company either by way of fresh allotment or through transfer of shares from the Trust. In case of fresh allotment, there is no question of paying STT upon acquisition. Even in cases where the Trust route is opted by the listed company and the trust acquires shares of the company from secondary market, the STT will be paid when the Trust will acquire shares. However the transfer of shares from Trust to employee will be an off-market transaction. In this manner, employee can never pay STT at the time of acquisition of ESOP Shares-neither in case of fresh acquisition nor in case of Trust route. Accordingly, the benefit of holding ESOPs for long term will not be available anymore.

By the announcement of this Budget, ESOPs and Private Placements have been put under grey area as there is no explicit clarity over the exemption from long term capital gains arising upon transfer of these shares by the holder of such shares. This will lead to dilution of the basic idea of wealth creation and retention of employees by granting ESOPs to them. They will not get any benefit by opting and holding ESOPs for a longer period.

Presently these are the specimen provisions and the actual exemptions are yet to come. Regulators need to consider to exempt ESOPs as well as Private Placements from the levy of long term capital gain tax upon non-payment of securities transaction tax at the time of acquisition.

Ms. Mohini Varshenya

Ms. Mohini Varshenya

Partner & Head-ESOP Services



+91 9971673332

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