Budget 2017: IPO aspirants look for clarity on capital gains tax

Illustration: Ajay Mohanty
Promoters of companies might wait for a list of exemptions in the Budget proposal to levy the long-term capital gains tax (LCGT) before they come up with initial public offerings (IPOs).


The Budget has proposed a 10 per cent LCGT on share sales on which the securities transaction tax (STT) was not paid at the time of the purchase after 2004.


The income-tax department has said that shares bought in IPOs will not attract this tax and an exhaustive list of exemptions will be issued.


Currently, there are more than 10 companies that have received the nod of the Securities and Exchange Board of India (Sebi), the regulator, but haven’t launched their IPOs, the Sebi data show. The value of these IPOs is around Rs 8,000 crore.


There is no tax on long-term capital gains, that is, earnings for sales of shares held for more than a year. Short-term capital gains attract a tax of 15 per cent. 


Although the government has not explicitly stated that the promoter holding would be subjected to LCGT, some investment bankers and companies are awaiting clarity before proceeding with IPOs.


The memorandum explaining the provisions of the Finance Bill, 2017, says that transfers of shares such as IPOs on which this tax will not apply will be notified. But uncertainty is there till the list comes out.


The Centre has said the move is aimed at shell companies and sham transactions, but market players want the government to issue a list of cases in which there is no need to pay LCGT.


“Market participants have given their feedback to the government about their concerns on the provisions. The government is likely to come up with an exhaustive list of exceptions soon. But until then, we might see some pause in the primary markets,” said an investment banker.


The notification enlisting the excluded transactions is expected on the issue, said Amit Maheshwari, partner with Ashok Maheshwary & Associates LLP, adding that the list of exemptions should be issued quickly so that the companies can come up with IPOs.


Maheshwari said if the clarifications did not come by March 31, investors and promoters holding shares issued in IPOs for more than a year (since 2004) might be unnerved. In that case, he said such investors might sell their shares and repurchase them. As there is no long-term capital gains tax in the current year if the purchase is through the exchange, they might escape this tax from the next financial year since their subsequent purchases would be from next year. This might bring share prices under pressure, he said.


Legal experts say the provisions are a fallout of cases in which promoters and companies had misused LTCG and now there is a chance that the wording of the provisions could hit genuine transactions like investors selling stakes that were accumulated before IPOs after the company lists.


“The primary intent of this particular amendment appears to be emanating from the various interim ex-parte orders (of Sebi) in which issues of shares on a preferential basis had been misused by the entities connected to the listed company,” said Yogesh Chande, partner, Shardul Amarchand Mangaldas.


Chande said the wording would require clarity, especially in cases of shares offered by a seller in an IPO because such transactions did not attract STT.


Dharmesh Mehta, managing director, Axis Capital, said the provisions might have evoked concerns but the companies need not worry. “I think the government will soon come up with the fine print, putting an end to all such concerns. Logically, the companies coming up with IPOs are unlisted and hence I don’t think the provisions could be extended to such transactions,” Mehta added.  


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* Budget proposes long-term capital gains tax on share sales on which securities transaction tax is not paid post-2004

* Measure targeted to nab shell companies

* Income-tax department to issue list of exemptions

* Those to come out with initial public offerings (IPOs) waiting for the list

* Over 10 companies have Sebi nod for IPOs, valued at around Rs 8,000 crore

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