Income from sale of unlisted equities to be treated as capital gains: CBDT

NEW DELHI: India's apex direct taxes body has said income from sale of unlisted equities would be treated as capital gains in a move that gives significant relief to private equity, offshore and alternative investment funds.

The directive puts to rest the debate over treatment of income from sale of unlisted shares as capital gains or business income. This also gives certainty to foreign investors taking advantage of favourable tax treaties such as India- Mauritius.

The Narendra Modi led NDA government that promised predictability and certainty in the tax policy has already given out a clarification with regard to sale of listed shares.

This circular by the Central Board of Direct Taxes seeks to address industry's concerns over treatment of shares in unlisted companies.

“A welcome move that removes uncertainty in respect of classification of income in case of transfer of shares of an unlisted company, " said Vikas Vasal, tax partner, KPMG in India. The CBDT has said income arising from transfer of unlisted shares would be considered under the head 'Capital Gains', irrespective of period of holding. Quoting February 2016 clarification on income characterization for listed shares wherein 12-months threshold has been specified to treat income as capital gains and not business income, the CBDT said for determining the tax-treatment of income arising from transfer of unlisted shares for which no formal market exists for trading, a need has been felt to have a consistent view in assessments pertaining to such income. In many cases assessing officers were treating such gains as income, leading to disputes.

“Categorizing of gains derived from sale of unlisted shares (especially in cases where the transfer was without transfer of control and management of underlying business), as business income, by tax officers was devoid of merit which the CBDT has rightly ordered to set right by classifying it as capital gains irrespective of the holding period,” said Amit Maheshwari, Partner, Ashok Maheshwary & Associates.

“These shares having no ready market as such and can under no stretch of imagination be viewed to be held for trading,” added Maheshwari.

However, three exceptions have been carved out where this clarification shall not apply. These would include situations in which genuineness of transactions in unlisted shares itself is questionable, transfer of unlisted shares is related to an issue pertaining to lifting of corporate veil and transfer of unlisted shares along with the control and management of underlying business. In these situations assessing officers would take appropriate view, the CBDT has said