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Rashmin Sanghvi & Associates

Chartered Accountants

220, 2nd Floor, Arun Chambers,
Tardeo Road,
Mumbai - 400 034,
Maharashtra, India.

Tel. Nos.: (+91 22) 2351 1878, 2352 5694.

Fax : (+91 22) 2351 5275.

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Home Articles Taxation         Share :

Budget 2017Chapter F

28. Anti-avoidance rule for Penny Stock scams [Section 10(38)]:

28.1 In the recent past, there have been multiple penny stock scams whereby black money was routed through sale of shares on stock exchange to create white money. This was helped by the fact that Long Term Capital Gain on shares sold on stock exchange are exempt from tax. Instead, Securities Transactions Tax (STT). Each party to the transaction – purchaser and seller pay STT. There is no condition that the seller should have purchased the shares on the stock exchange and should have paid STT. The modus operandi is as follows:

Source: LiveMint.com:

http://www.livemint.com/Money/K7ZShkwxTNahd1v5pHT9HK/Penny-stocks-scam-Stockbrokers-turned-a-blind-eye-to-KYC-no.html

28.2 The Finance Bill 2017 proposes a proviso to the above provision whereby the exemption will be allowed only if the purchase also happens over the stock exchange. Therefore, both purchase and sale legs of the transaction are to happen over the stock exchange. This is a Special Anti-Avoidance Rule (SAAR).

28.3 The exemption for Long Term Capital Gain was brought in to effect from 1st October 2004 by introducing STT in place of a tax on capital gains. Therefore, this proposed restriction is also applicable only for shares purchased after 1st October 2004.

28.4 Further, there would be genuine transactions where shares are not purchased on the stock exchange. In such cases, the exemption would still be available. For example, shares purchased on IPO or FPO, through FDI, attained as bonus or rights issue, etc. Further, there would be transfers which would not be subject to STT like mergers and demergers. The Government will notify a list of such purchases and transfers.

28.5 While the intention seems to cover large scale laundering which was taking place, the provision may not be effective. This is because, the provision aims to only remove the exemption for sale of shares which were not listed when they were purchased. However, there can be instances of similar transactions using shares of listed shell companies. These would not get covered under the proviso. Further, those who have purchased such unlisted shares which have later on got enlisted on a stock exchange, would easily circumvent the provision by selling the shares and buying them back on the stock exchange before 31st March 2017. The Government as per its promise has not carried out any retrospective amendment.

28.6 In any case, the effect of the transaction is that the exemption from tax would be lost for such transfers. It does not penalise the launderers or disallow such transfers at all. Therefore, the laundering process will now be liable to tax on sale of such shares, but such transfers would not be restricted. Separately, the Government is working on weeding out such transfers, finding out the perpetrators and marking out those companies which are being used for such laundering schemes.

28.7 The list of transactions that will not be covered by this proviso is yet to be prescribed by the Government. It should ideally cover all genuine transactions of purchase of shares without payment of STT.

28.8 It may be noted that this amendment is only for Long Term Capital Gain. It is not for Short Term Capital Gain. The modus operandi to convert black money into white can be applied in case of Short Term Gain also. However Short Term Gain is chargeable to tax at 15% instead of 30%. The saving of 15% tax is perhaps not worth the effort!