LS passes Finance Bill 2018; unlisted stocks to get indexation benefits

LS passes Finance Bill 2018; unlisted stocks to get indexation benefits

Finance Bill passed by Lok Sabha without debate; relief for start-ups, PPF holders

The Lok Sabha on Wednesday passed the Finance Bill 2018, allowing the benefit of inflation adjustments to stocks that were unlisted till January 31 while levying long-term capital gains (LTCG) tax.The move might provide tax benefits to shareholders of the National Stock Exchange (NSE), others who have invested in employee stock ownership plans (ESOPs), and in certain merger and acquisition cases.

The Bill retained the LTCG tax without removing the securities transaction tax (STT) and the indexation benefits provided to all shares.The amendments to the Bill also provided relief to start-ups and immunity to the holders of public provident funds (PPF) from any attachment of their funds by authorities.For the first time in years, the Bill was passed without any debate in the Lok Sabha and drew flak from the Opposition. Since it is a Money Bill, the Rajya Sabha’s approval is not required. The entire exercise, including the President’s assent, has to be completed by the end of this month so that the Budget provisions come into effect from April 1.

The Bill, tabled by Finance Minister Arun Jaitley in February, proposed to levy the LTCG tax at the rate of 10 per cent on listed securities for capital gains exceeding ~100,000. Indexation benefits are also not provided to these, but the proposal grandfathered all gains up to January 31.The amendments have provided indexation benefits to stocks that were unlisted as on January 31 but will be listed when sold from April 1 onwards.

Naveen Wadhwa, a tax expert with Taxmann, said: “It would have been better if investors were allowed to secure the valuation of unlisted shares from a merchant banker or a chartered accountant as on January 31.”He said this was because inflation was only one factor and did not reflect the true price of shares that would be listed.Rajesh H Gandhi, partner at Deloitte India said this was an easier way of providing the benefit of grandfathering to unlisted shares rather than asking for a valuation of unlisted shares, and would help shareholders of companies such as the NSE, which could be listed in the future.

“The fair market value of shares, which were unlisted as on January 31, but listed on the date of transfer, shall be indexed according to the cost of acquisition. This will also apply to unlisted shares, which are substituted in tax-neutral transfers (amalgamation, demerger, gift, succession),” said Rajiv Chugh, Tax Partner, EY India.Wadhwa added that other changes in the provisions of the LTCG tax were made to do away with drafting errors in the Bill. For instance, the Bill explains the method of computation of the cost of acquisition of listed shares but those were explained in Section 112A of the Income Tax Act. This has now been moved to Section 55.

“The amended Bill clears the air over several ambiguities and anomalies on the new LTCG regime, cost base,” added Chugh. However, he said certain ambiguities still remained on other proposals such as the deemed dividend taxation of accumulated profits of an amalgamating company, applicability of prosecution for non-filing of returns of income to foreign companies whose incomes are fully covered by withholding tax, and restrictive relief from the minimum alternate tax (MAT) for non-resident companies under presumptive basis of taxation.

The amendments tweaked the eligibility criteria for start-ups for claiming income-tax exemptions. Of seven years from the date of incorporation, the exemptions were available to an eligible start-up for three consecutive years and the start-up had to decide which three years were to be considered. The exemptions were available subject to certain conditions.

One of these conditions was that the annual turnover of a start-up should not exceed Rs 250 million in any of the seven years. The amendment has tweaked the provision and the seven years will be counted from the year the start-up claimed its first exemption.Jiger Saiya, partner BDO India, said: “The earlier condition was restrictive. The linking of the turnover limit directly to the year of claim is a welcome move.”

The changes in the Bill also provided relief to PPF holders. Immunity will be provided to the holder from attachment even if there is a court decree or order demanding that. A new section, 14A, has been added for this purpose. The amendments plugged loopholes in the language of provisions related to relief on investment of capital gains from property in National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC) bonds.

The Bill provides exemption up to Rs 5 million if capital gains made from land or buildings are invested in these bonds and remained in a lock-in period of five years, up from the earlier period of three years. When the Bill was tabled, it did not have a clarification on what would happen if an investor withdrew money before five years, but now the amendment states that exemption will not be provided in this case

Congress leader Shashi Tharoor tweeted, “The passing of the Finance Bill, Appropriation Bill & all demands for grants by voice vote without discussion is a betrayal of parliamentary democracy. These are among the sovereign tasks of the Lok Sabha. They have been usurped by the executive.”

Meghnad S, an independent policy analyst, said, “The Lok Sabha Speaker had said that a guillotine with respect to demands for grants, scheduled to be taken up at 5 PM on Wednesday, would be taken up after noon. The Bill, however, was extremely unexpected. The current session runs till April 6 so would there not be time to discuss the Bill even for a few hours?”

The Business Standard, New Delhi, 15th March 2018

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