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:
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!
29.1 Over the past few years, provisions have been introduced in the Income-tax Act to tax receipts of sums of money and certain other properties which were received without consideration or for insufficient consideration. These provisions were introduced to counter laundering of black money. There is a threshold of Rs. 50,000. Exemption is provided for amounts or properties received from relatives, on marriage, under a will, etc.
The position presently is that individuals and HUFs are taxed in such situations on receipt of sums of money, immovable property, jewellery, bullion, art, shares and securities, etc., without consideration or for insufficient consideration. Further, firms and private companies are taxed on receipt of shares of another private company without consideration or at a value lesser than the fair market value.
29.2 The fair market value of immovable property, shares and other assets is as prescribed in the Rules.
29.3 The Finance Bill 2017 proposes make the following changes:
29.3.1 The provisions now target all persons. This will hence now include public listed companies, AOPs and BOIs apart from individuals, HUFs firms and companies which were already covered under the existing provisions.
29.3.2 Further, any person will be liable to tax on receipt of sum of money, immovable property and other specified properties mentioned above. Therefore, while firms and private companies are presently liable to tax only in respect of shares; now firms, companies, and other persons would be liable to tax on receipt of all specified properties.
29.3.3 A few examples of transactions that will now get covered are:
A partner contributing immovable property in the firm as his capital. The normal provision is that whatever value is recorded in the accounts of the firm, is the sale value. If the partners record the transaction at say cost of property, there will be no tax. However the firm will be liable to tax on the difference between fair value and what is recorded in the accounts.;
A public listed company receiving any of the specified properties without consideration or for insufficient consideration;
An AOP receiving immovable property from one of the members for a value which is lesser than that prescribed as per the provision; etc.
29.3.4 Some transactions such as receipt from a relative or charitable trust are exempt from this section. Following further exemptions have been provided:
Receipts by charitable trusts and institutions;
Receipt of assets on partition of HUF;
Receipt of shares on certain corporate mergers and demergers which are exempt from tax under Section 47.
29.4 It may be noted that only specified “capital assets” are covered by this provision. Stock-in-trade is not covered.
Further, the provision applies to specified properties. All properties are not covered by this provision. For example, receipt of “share in a LLP”, intellectual property and knowhow are not covered by this provision.
29.5 While the provisions are meant to tax transfers between persons, the practical fallout is that genuine transactions not involving laundering of black money also get covered. Further, the provisions act as barriers limiting the price at which properties are transferred between two non-related entities. Therefore, all persons should now be careful while transferring any properties covered by this provision.