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16 November 2018
Section 112A of the Income Tax (IT) Act 1961 provides for a 10% tax on long-term capital gains arising from the transfer of equity shares, units of equity-oriented funds or units of a business trust, provided that securities transaction tax (STT) is paid following the acquisition and transfer. To protect genuine cases where STT could not be paid following acquisition of the equity shares, the Central Board of Direct Taxes (CBDT) issued a draft notification in April 2018.(1)
The CBDT has now issued the final notification in line with its draft notification.(2) The list of permissible transactions to benefit from Section 112A of the IT Act has been expanded to include capital contribution in firms and associations of persons or distribution on dissolution thereof. This is subject to the condition that the previous owner's acquisition was not achieved by a mode specified in the negative list (ie, an impermissible transaction under Section 112A).
The interest payable by an Indian company or a business trust to a non-resident in respect of rupee denominated bonds issued outside India is taxable at a 5% concessional rate. In order to maintain the current account deficit and augment the foreign exchange inflow, tax incentives have been provided to offshore rupee denominated bonds. The interest on bonds issued between 17 September 2018 and 31 March 2019 will be exempt from tax and will not be subject to withholding tax. Legislative amendments will be proposed in due course.(3)
Section 56(2)(viib) of the IT Act provides that considerations received by closely held companies for the issue of shares in excess of the fair market value is taxable as income from other sources.
The Chennai Tax Tribunal recently considered a case where an Indian company had issued shares to one of its shareholders at a premium of Rs23,086 per share (face value of Rs10 per share).(4) The shareholder in question was the daughter of another shareholder. The tax officer had invoked Section 56(2)(viib) of the IT Act, citing an unrealistic premium. On further appeal, the Chennai Tax Tribunal noted as follows:
For further information on this topic please contact Pranay Bhatia at BDO in India by telephone (+91 22 3332 1600) or email (firstname.lastname@example.org). The BDO in India website can be accessed at www.bdo.in.
(1) For further details, please click here.
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