Concessional tax of 10% on capital gains to an NRI is debatable
Anand Dhelia and Ajit Kamdar
Senior Tax Professionals, Ernst & Young
Are you a non-resident and have sold listed shares of an Indian
company in an off market deal? In that case, Long term capital gains
on sale of such shares could be taxable at the rate of 20%. This is as
per the recent pronouncement by the Authority for Advance Ruling
('AAR') in the case of Cairn UK Holding Ltd where the AAR concluded
that non-resident taxpayers are not entitled to claim the concessional
rate of 10% for taxation of long term capital gains on sale of shares.
Though the ruling of AAR is binding only on the applicant and on the
Tax Authority in relation to the transaction it is sought, the ruling
does have a persuasive value for others.
As per the current provisions of the Income Tax Act, gains arising
from sale of equity shares held for more than twelve months are
categorised as 'long term capital gains' and are subject to tax
inter-alia in the following manner:
Long Term Capital Gains on equity shares Tax Rate
Listed equity shares subject to securities transaction tax (stock
exchange transaction) Exempt
Listed equity shares - Off market sale Taxpayer has an option to
offer such capital gains to tax at 20.6 percent after indexation* or,
at 10.3 percent without indexation, whichever is beneficial (Refer to
the example given below)
*Indexation is an adjustment to cover inflation over the years
Example: Consider 10,000 shares of an Indian Company bought in May
2005 @ Rs. 30 per share are sold through an off market deal in March
2011 @ 200 per share. The computation of Long term capital gain under
the two options would be as under :-
Option 1
(With Indexation) Amount (Rs) Option 2
(Without Indexation) Amount (Rs)
Sale Consideration 20,00,000 Sale Consideration 20,00,000
Less: Indexed Cost of Acquisition - (3,00,000*711/497)* 4,29,175
Less: Cost of Acquisition 3,00,000
Long Term Capital Gain 15,70,825 Long Term Capital Gain 17,00,000
Tax liability@20.6% (including cess) 3,23,590 Tax liability@10.3%
(including cess) 175,100
*Cost Inflation Index (CII) for the tax years 2010-11 and 2005-06
As can be inferred from above, option 2 for the concessional rate is
beneficial for the tax payer.
The option of 20% or 10% long term capital gain tax rate is applicable
to all the taxpayer irrespective of their residential status, other
than the non-resident taxpayer who has acquired the shares by
utilising foreign currency. In case of non-resident taxpayer, who has
acquired shares utilising foreign currency, the mechanism for
computing capital gains is different. In such cases, non-residents
have been given protection against the exchange rate fluctuations,
while arriving at the capital gains from sale of shares of an Indian
company and are denied the indexation benefits.
Having regard to the above, the issue before the AAR was whether these
non-residents for whom the indexation benefit does not apply (i.e.
where shares have not been purchased in foreign currency) were also
eligible to claim the beneficial rate of 10%. The ruling was
pronounced in respect of the Scotland based applicant, Cairn UK
Holdings Ltd ('herein after referred to as Cairn UK' or 'company').
Cairn UK had sold shares of its Indian subsidiary, Cairn India Ltd, to
Petronas Corporation International Limited (sale done off-market i.e.
not through the stock exchange) and was seeking a certificate from the
tax department for lower deduction of tax rate of 10% which was turned
down by the department. Hence, the Company sought an advance ruling
from the AAR.
Company (Non-resident) contended that the concessional tax rate of 10%
was applicable on long term capital gains arising on the sale of
shares of an Indian company (in an off-market transaction) in case the
benefit of indexation was not availed. Company contended that the
concessional tax rate benefit is available to both non-residents and
residents and that if the legislature intended to restrict the option
of concessional benefit to residents only, specific language would
have been incorporated to that effect. The Company further contended
that merely because a resident can have only one benefit (either
indexation or 10% rate), non-residents cannot be denied benefit of the
concessional rate on the grounds that protection against exchange rate
fluctuation is available to them. Availability of exchange rate
fluctuation could be a justification to deny the indexation benefit,
but the same cannot be said to apply for denying the lower rate of
10%. Reliance was placed on an earlier pronouncement of the AAR in the
case of Timken France, where it was held that the benefit of
concessional rate of 10% should be allowed to non-residents.
The AAR after considering the above arguments came to a conclusion
that the concessional rate of 10% would only be applicable in a
scenario where taxpayer has foregone the indexation benefit. Since in
case of non-resident, indexation benefit is itself not applicable, the
concessional benefit could not be given to non-resident. Reliance was
also placed on an earlier decision of the Mumbai Tribunal where in it
was held that non-residents will not be eligible to the concessional
tax rate of 10% since a pre-condition for claiming the benefit of 10%
tax rate was the entitlement for the indexation benefit.
Despite the pronouncement of the AAR, the question of availability of
concessional rate of tax of 10% on capital gains to a non-resident is
debatable. The view emerging from the earlier rulings had largely been
favourable to taxpayers and the issue is currently pending before the
Supreme Court which would finally settle the matter.
Till then, we need to be more cognizant of the above scenario for
non-residents who have adopted the position of taxing their capital
gains at 10%.
(Views expressed are personal)
Are you a non-resident and have sold listed shares of an Indian
company in an off market deal? In that case, Long term capital gains
on sale of such shares could be taxable at the rate of 20%.
--
CA Ramachandran Mahadevan,M.Com.,F.C.A.,
Anand Dhelia and Ajit Kamdar
Senior Tax Professionals, Ernst & Young
Are you a non-resident and have sold listed shares of an Indian
company in an off market deal? In that case, Long term capital gains
on sale of such shares could be taxable at the rate of 20%. This is as
per the recent pronouncement by the Authority for Advance Ruling
('AAR') in the case of Cairn UK Holding Ltd where the AAR concluded
that non-resident taxpayers are not entitled to claim the concessional
rate of 10% for taxation of long term capital gains on sale of shares.
Though the ruling of AAR is binding only on the applicant and on the
Tax Authority in relation to the transaction it is sought, the ruling
does have a persuasive value for others.
As per the current provisions of the Income Tax Act, gains arising
from sale of equity shares held for more than twelve months are
categorised as 'long term capital gains' and are subject to tax
inter-alia in the following manner:
Long Term Capital Gains on equity shares Tax Rate
Listed equity shares subject to securities transaction tax (stock
exchange transaction) Exempt
Listed equity shares - Off market sale Taxpayer has an option to
offer such capital gains to tax at 20.6 percent after indexation* or,
at 10.3 percent without indexation, whichever is beneficial (Refer to
the example given below)
*Indexation is an adjustment to cover inflation over the years
Example: Consider 10,000 shares of an Indian Company bought in May
2005 @ Rs. 30 per share are sold through an off market deal in March
2011 @ 200 per share. The computation of Long term capital gain under
the two options would be as under :-
Option 1
(With Indexation) Amount (Rs) Option 2
(Without Indexation) Amount (Rs)
Sale Consideration 20,00,000 Sale Consideration 20,00,000
Less: Indexed Cost of Acquisition - (3,00,000*711/497)* 4,29,175
Less: Cost of Acquisition 3,00,000
Long Term Capital Gain 15,70,825 Long Term Capital Gain 17,00,000
Tax liability@20.6% (including cess) 3,23,590 Tax liability@10.3%
(including cess) 175,100
*Cost Inflation Index (CII) for the tax years 2010-11 and 2005-06
As can be inferred from above, option 2 for the concessional rate is
beneficial for the tax payer.
The option of 20% or 10% long term capital gain tax rate is applicable
to all the taxpayer irrespective of their residential status, other
than the non-resident taxpayer who has acquired the shares by
utilising foreign currency. In case of non-resident taxpayer, who has
acquired shares utilising foreign currency, the mechanism for
computing capital gains is different. In such cases, non-residents
have been given protection against the exchange rate fluctuations,
while arriving at the capital gains from sale of shares of an Indian
company and are denied the indexation benefits.
Having regard to the above, the issue before the AAR was whether these
non-residents for whom the indexation benefit does not apply (i.e.
where shares have not been purchased in foreign currency) were also
eligible to claim the beneficial rate of 10%. The ruling was
pronounced in respect of the Scotland based applicant, Cairn UK
Holdings Ltd ('herein after referred to as Cairn UK' or 'company').
Cairn UK had sold shares of its Indian subsidiary, Cairn India Ltd, to
Petronas Corporation International Limited (sale done off-market i.e.
not through the stock exchange) and was seeking a certificate from the
tax department for lower deduction of tax rate of 10% which was turned
down by the department. Hence, the Company sought an advance ruling
from the AAR.
Company (Non-resident) contended that the concessional tax rate of 10%
was applicable on long term capital gains arising on the sale of
shares of an Indian company (in an off-market transaction) in case the
benefit of indexation was not availed. Company contended that the
concessional tax rate benefit is available to both non-residents and
residents and that if the legislature intended to restrict the option
of concessional benefit to residents only, specific language would
have been incorporated to that effect. The Company further contended
that merely because a resident can have only one benefit (either
indexation or 10% rate), non-residents cannot be denied benefit of the
concessional rate on the grounds that protection against exchange rate
fluctuation is available to them. Availability of exchange rate
fluctuation could be a justification to deny the indexation benefit,
but the same cannot be said to apply for denying the lower rate of
10%. Reliance was placed on an earlier pronouncement of the AAR in the
case of Timken France, where it was held that the benefit of
concessional rate of 10% should be allowed to non-residents.
The AAR after considering the above arguments came to a conclusion
that the concessional rate of 10% would only be applicable in a
scenario where taxpayer has foregone the indexation benefit. Since in
case of non-resident, indexation benefit is itself not applicable, the
concessional benefit could not be given to non-resident. Reliance was
also placed on an earlier decision of the Mumbai Tribunal where in it
was held that non-residents will not be eligible to the concessional
tax rate of 10% since a pre-condition for claiming the benefit of 10%
tax rate was the entitlement for the indexation benefit.
Despite the pronouncement of the AAR, the question of availability of
concessional rate of tax of 10% on capital gains to a non-resident is
debatable. The view emerging from the earlier rulings had largely been
favourable to taxpayers and the issue is currently pending before the
Supreme Court which would finally settle the matter.
Till then, we need to be more cognizant of the above scenario for
non-residents who have adopted the position of taxing their capital
gains at 10%.
(Views expressed are personal)
Are you a non-resident and have sold listed shares of an Indian
company in an off market deal? In that case, Long term capital gains
on sale of such shares could be taxable at the rate of 20%.
--
CA Ramachandran Mahadevan,M.Com.,F.C.A.,
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