Now, tax worry haunts unlisted share market | Economic Times

Mumbai: A recent government clarification on tax collection at source may end up increasing costs for private equity funds and owners of unlisted shares. The government had introduced a TCS of 0.1% on sale of goods worth ₹50 lakh and above with effect from October 1. However, through a circular dated September 29, the finance ministry clarified that listed shares are exempt from the ambit of this tax. This has now led to fears that the TCS will continue to apply on unlisted shares and pre-IPO allotments, said people dealing with the matter. Private equity firms are the dominant holders of unlisted shares. Before the clarification, the industry assumed that the law wasn’t intended for shares. “This is virtually like STT (Securities Transactional Tax) for unlisted shares and is disadvantageous for big-ticket institutions,” said the associate vice-president of an American PE fund on condition of anonymity. Different Interpretations of ‘Goods’“However, we are still hopeful that the law isn’t intended for sale of shares and the government will clarify accordingly.”Not just PE funds, the law will impact any transactions of over ₹50 lakh in unlisted shares. These would include any share sale by promoters of an unlisted company as well. Tax experts say, even the investors who tender their shares through IPO could also be covered under the TCS since at the time of IPO allotment, the company’s shares are still unlisted. The TCS will be a part of the income tax payable by the investors. But most institutional investors like PEs don’t have any income tax liability as such – instead they pay capital gains tax based on their share transactions. In such a scenario, the PE will have to seek a refund from the tax department, thereby locking the money for more than a year. “The circular has raised anxieties because listed securities have been specifically exempted from TCS,” said Rajesh Gandhi, partner, Deloitte. “Shares and other securities have been considered as goods under certain laws and so it would be better if the government clarifies the intent to levy TCS on sale of unlisted shares and securities.”Tax experts say different laws have different interpretations of what are goods. For instance, the Sale of Goods Act includes even shares under the definition of goods. But the GST law, which has superseded all indirect tax laws, doesn’t consider shares as goods.