Home World Economy Inflation indexation likely for unlisted shares

Inflation indexation likely for unlisted shares


NEW DELHI: The government plans to provide benefit of inflation indexation while computing the long-term capital gains tax on shares that were unlisted as on January 31, 2018 in a relief for those holding unlisted shares in startups and other companies.

The indexation benefit would help increase acquisition cost of unlisted shares in line with inflation over the holding period for the purpose of tax calculation, thus reducing the capital gains amount and the tax levied on the gains, officials said. Industry had represented to the government on the issue after long-term capital gains (LTCG) tax was announced in the Union budget. It proposed 10% capital gains tax on shares and equity-oriented mutual funds.

The indexation benefit would be available to those shares that were unlisted as on January 31, 2018 and get listed subsequently, bringing some relief to initial public offer market.

The benefit will also apply to listed shares acquired in exchange of unlisted shares held by the assessee, effectively covering cases of mergers and acquisitions and corporate restructuring where shareholders of unlisted entity get shares of listed entity in exchange.

The government is likely to move an amendment to the Finance Bill 2018 when it is taken up in Parliament to introduce inflation indexation benefit, the sources said.

The bill was listed for discussion in Lok Sabha on Tuesday, but the house was adjourned without any business for the seventh day running.

The amendment is also likely to provide that amount to the credit of any depositor in Public Provident Fund (PPF) account cannot be attached under any law to recover any debt or liability of the depositor.
The government informed Rajya Sabha that representations have been received requesting for withdrawal of the proposal to impose long-term capital gains tax. “The decision will be reflected in the official amendment, if any, to the Finance Bill, 2018, at the time of consideration and passing by Parliament,” minister of state for finance Shiv Pratap Shukla said in a written reply to a question.

Limited indexation
In case of transfer of capital assets other than shares and mutual funds, indexation benefit is provided whereby the cost of acquisition is adjusted for inflation. The LTCG tax regime announced in the budget did not provide for such indexation.

That benefit is now likely to be provided in a limited way for unlisted shares that are subsequently listed. The cost inflation indexation will be provided from the year of purchase of the asset or April 2001, whichever is later, to FY18.

Economic presence
Through the amendments the government would tighten the proposed changes to Section 9 of the Income Tax Act to define ‘significant economic presence’ to tax new business models operating remotely through digital medium.

“The proposed widening of the scope of significant economic presence creates a further challenge to companies with digital transactions,” said Abhishek Goenka, leader, corporate and international tax, at PwC India.

“While no doubt the treaty benefits remain available for the present, with possible changes in treaties also expected soon through the multilateral treaty instrument, it seems like an uphill road for such companies,” he said.

The Finance Bill 2018 provides that transactions or activities would constitute ‘significant economic presence’ as provided by the law whether or not the non-resident has a residence or place of business in India or the non-resident renders service in India.

The proposed amendment has added another condition that this would apply whether or not the agreement for the transaction or activity in question is entered in India.


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