Transaction of shares under offers for sale have been brought under the capital gains tax net with the Budget amending the tax provisions with retrospective effect from assessment year FY19.
The Budget memorandum noted that taxpayers in some cases were not paying capital gains tax on transfer of shares acquired through the offer for sale (OFS) route, citing the absence of an express provision for determination of the fair market value of such equity shares since they were still unlisted on the date of transfer even though securities transaction tax has been paid on transfer and thus, cost of acquisition is indeterminable, and capital gains is not chargeable.
This was a loophole in the system that holders of such shares were taking advantage of. Tax experts pointed out that this was more in the nature of a clarification since there had been ambiguity over the fair market value of the securities held, since they were neither classified as listed or unlisted.
Tax provisions
Initial public offerings by companies usually have an OFS component and it is in the sale of respect of such shares that the amendments in the tax provisions have been made. This will have an impact on anchor investors, early-stage investors, private equity firms and promoters, who will now be liable to pay tax on the gains made in the OFS component, if they participate in it.
According to the Budget memorandum, the tax liability will be computed based on the purchase cost indexed to January 31, 2018.
There is likely to be a significant tax impact on offloading of shares through the OFS route, as only the indexed cost of acquisition as on January 31, 2018, would be available as a deduction against the fair market value on that date.