India Inc rushes for inter-se share transfer to beat tax

India Inc may have saved about ₹5,000 crore in tax liabilities through the inter-se transfers of shares between promoter entities in March.

At least 30 large listed corporates have transferred shares between promoter entities before the March 31 deadline to avoid taxes that come into effect from Saturday.

New taxes that kick in from April 1 have pushed companies to make group-level reorganisations by the year end.

These include transfer of shares of nearly ₹1,00,000 crore in two tranches by Reliance Industries in March.

Promoters of Wockhardt, Marico, Apollo Tyres, Lovable Lingerie, Strides Shasun, Westlife Development, Indiabulls Housing, Aurobindo Pharma, DB Corp, Reliance Power, Raymond and Bombay Dyeing, among several others, have undertaken organisational restructuring.

While the actual savings could not be independently verified due to multiple taxes, a back-of-the-envelope calculation done by a tax expert at a top consulting firm revealed that corporates saved ₹5,000 crore by undertaking the transfer ahead of April 1.

Three different kinds of tax scenarios begin from April 1, prompting such transfers. The Finance Bill 2017 has proposed that from April 1, shares that promoters of companies have held from before October 1, 2004, where Securities Transaction Tax has not been paid, will not receive an exemption from long-term capital gains tax when these shares are eventually sold.

So, transferring the shares between promoter groups and paying the securities transaction tax on them secures the 11 per cent capital gains tax future exemption for these promoters.

Also, under Section 56 (2)(x) of the new I-T Act, transfers between individuals, trusts and limited liability partnership firms, which were earlier treated as gifts, will now be treated as deemed income and attract tax.

If the transfer happens below the book value of an unlisted company or below the market price of a listed company after April 1, then 35 per cent of the market value of the shortfall in consideration will be taxed.

So, if a promoter transfers 100 shares to another promoter entity at ₹10, then the gift element — or the deemed income — would be the current market price minus ₹10. This shortfall in consideration will attract a 35 per cent tax. And finally, the General Anti-Avoidance Rules (GAAR) also kick off this April. Under this, transactions that lack any commercial substance or that are not bona fide but merely done to avoid taxes will come under the scanner.

“Different promoters have undertaken these share transfers through March but all of them for a different reason,” said Amrish Shah, Executive Director, Tax Practice, EY. “People have combined all of this before the financial year end to take advantage of the more liberal tax provisions available now.”

However, it will be difficult to accurately estimate the total potential tax savings that corporates have made.

Radhika Jain, Director, Grant Thornton Advisory Private Ltd, said that to estimate the tax savings, one needs to know the cost of acquisition of the promoter’s shares, at which value they were transferred and what portion of the transfer would qualify as deemed income. “A lot of that information is not publicly available.”