Income tax on Long Term Capital Gains of an Unlisted , pvt ltd company-Reg

[R V SECKAR]

Dear All,

Please clarify the following:

Some shareholders of a private ltd co wants to purchase the entire shareholding from a foreign investor who has held the shares for the last 3 years.

In such scenario , what will be the long-term capital gain tax to be deducted at source before making payment to them.( Please note that foreign holder has no PAN No or place of office in India).

Is surcharge is applicable to these transaction at it exceeds Rs 1 Crore ( the consideration for shares to be paid).

If the shares are held by the foreign company for more than three years , then whether it is exempted from Long Term Capital Gains Tax or lower rate of tax is applicable .

Thanks in advance,

Regards,

R.V.Seckar

[ravi p]

Dear RV Seckar

 

I have tried to clarify your query in the below mentioned paragraphs

 

Section 195(1) of Income Tax Act 1961 clearly stipulates that any person responsible for paying to a non-resident any sum chargeable to tax under the provisions of Indian Income Tax  Act (not being income chargeable under the head "Salaries")shall, deduct income Tax  thereon at the rates in force

 

Section 195(2) stipulates that -Where the person responsible for paying any  sum chargeable under this Act ¹⁴ [(other than salary)] to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the ⁷ [Assessing] Officer to determine, ⁸ [by general or special order] , the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.

 

 

In my opinion, the transaction mentioned in your email attracts TDS u/s 195.  The rates of tax for long term capital gain is  20%+ EC 0 .4% + SHEC 0.2% totaling to 20.6%. (if the payee is an individual or non-domestic company with payment less than one crore).If the payment is above 1 crore the TDS is  20+ SC 0.5+ EC 0.41+ SHEC 0.205 totaling to 21.115%..  

 

Please note that, The surcharge  payable  for non-domestic company is 2.5% when the total payment exceeds 1 crore.

 

You can explore availing  exemption u/s 10(38)  subject to the fulfillment of following condition

Section 10¹ [ (38) any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund where-

(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and

(b) such transaction is chargeable to securities transaction tax under that Chapter.

²[Provided that the income by way of long-term capital gain of a company shall be taken into account in computing the book profit and income-tax payable under section 115JB]²

Explanation.-For the purposes of this clause, "equity oriented fund" means a fund-

(i) where the investible funds are invested by way of equity shares in domestic companies to the extent of more than ³[sixty-five per cent]³. of the total proceeds of such fund; and

(ii) which has been set up under a scheme of a Mutual Fund specified under clause (23D):

Provided that the percentage of equity share holding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures. ] ¹

 

In this case it appears that this exemption cannot be availed as the sale of shares is not chargeable to Securities Transaction Tax

 

Also note that, In the case of matters involving international taxation, we have to  check the provisions of Double Taxation Avoidance Agreement   also since assessee can adopt the provisions of Indian Income Tax Act or DTAA whichever is more beneficical.  Please Refer Section 90(2) of Income Tax Act 1961 in this regard

 

Regards

 

Ravi P

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From: R V SECKAR <rvsek...@gmail.com>
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Subject: [CSMysore] Income tax on Long Term Capital Gains of an Unlisted , pvt ltd company-Reg

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[ravi p]

Dear Seckar

 

This further to my email below, in my opinion the concessional rate of tax of 10% applicable for non-resdient Indians  u/s 115E cannot be applied wherever  TAXES TO BE DEDUCTED since the selection of option of tax under Section 115E  @ 10% or regular capital gain tax of 20% lies with the non-resident Indian tax payer not with the tax deductor

 

This point was missed in my previous clarification.

[R V SECKAR]

Dear All ,

I have done further research on the subject. This is regards to application of long-term or short-term capital gain tax applicable to an unlisted or a private limited Indian company shares to be transferred  or purchased from  a Non –resident or a foreign company

Long –Term Capital Gain Tax on shares of private limited company

It is to be observed that shares of unlisted companies if it is held by more than 3 years , then it will be considered as long term one and if it is disposed before three years, then it will be considered as short-term gains.

Nature of Asset	Short Term Capital Asset	Long Term Capital Asset
(i) Shares in a company or any other security listed in a recognised stock exchange in India or a unit of a Unit Trust of India or a  unit of a mutual fund specified under section 10(23D).	Held for not more than 12 months.	Held for more than 12 months.
(ii) Assets other than assets mentioned in (i) above.	Held for not more than 36 months.	Held for more than 36 months.

Source : Karnataka IT Department Web Site

In case of listed company, if the shares are sold through recognised stock exchange, then no long –term capital gain is attracted as it will be subject Security Transaction Tax (STT). However, if the shares of the listed company are sold outside the stock exchange, then long-term capital gain tax will be applicable. In such cases , only indexation can be applied.

For unlisted companies, no indexation is applicable.  The flat rate income tax on long –term capital gain tax will be 20% plus surcharge.

The following provisions will throw more light on the subject:

Non Resident Unitholders
Under section 115 E of the Act, in case of income of non resident Indians by way of long term capital gains, in respect of units is chargeable at the rate of 20% plus surcharge, if applicable. Chapter XIIA exclusively deals with taxation related to Non-resident Indians. Under section 115 D of the Income Tax Act, a non-resident Indian cannot avail the benefit of indexation.

In the alternative the capital gains tax may be computed by the non residents under section 112, if it is more beneficial to them. Under Section 112 of the Act, long term capital gains are taxed at the rate of tax @ 20% plus surcharge. The benefit of indexation is also available to the non residents under section 48 of the Income Tax Act, 1961. Gains on short term capital asset are taxed as regular income.

Income –Tax on capital gains

Long Term Capital Gains

As per Part II of the First Schedule to the Finance Act 2008 {Clause 1 (b) (i) (D)}, the Mutual Fund is liable to deduct tax @ 20% on long term capital gain.

(iii) Other than a Domestic Company:

Long Term Capital Gains
As per Part II of the First Schedule to the Finance Act 2008 {Clause 2 (b) (viii)}, the Mutual Fund is liable to deduct tax @ 20% on long term capital gains.

http://www.utimf.com/customer_services/customer_connect/tax_centre.aspx

 

Applying the above provisions , the following conclusion can be arrived at as there are lot of ambiguity in the Income Tax Act about the sale of unlisted company’s shares attracting either long-term or short-term capital gain tax:

1.No indexation is applicable for unlisted shares or shares of a private limited company. Please note that indexation is only a viable option for the listed company shares and an assessee may select to avail indexation or he can pay taxes even with out indexation.

2. For long term capital gains of a unlisted or a private limited , the tax rate is applicable will be 20% + 10% surcharge.

Other professional views on the subject are always appreciated.

 

R.V.Seckar