How does grandfathering of capital gains apply in case of corporate actions
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My question pertains to the applicability of grandfathering of capital gains in the case of corporate actions such as demergers and amalgamations. Let me illustrate with an example: I bought 100 shares of Company A in September 2016. In February of 2019, a scheme of demerger was approved by shareholders that entitled them to an equal number of shares in Company B (100 in this instant case; shares listed on the exchange in November 2019). I sell shares of both companies in October 2020. What should I reckon to be grandfathered price as on Jan 31, 2018, for both Company A and B to crystallise my capital gains liability? Please also confirm that the holding duration for both companies will be reckoned from the date of the original purchase, which is September 2016, and hence tax rate applicable in the case of Company B will also be LTCG.
Girish Balakrishnan
The following comments are based on assumption that the shares of company A are equity shares & listed in a recognised stock exchange in India.
As per the provisions of Section 112A of the Act, Long term capital gain (LTCG) on sale of STT paid equity shares exceeding ₹1 lakh shall be taxable at the rate of 10 per cent. Further, surcharge (if any) and health & education cess at 4 per cent shall apply. For the purpose of computing LTCG/LTCL, in cases where the asset is acquired before the 1st day of February, 2018, the cost of acquisition, shall be the higher of the following, as defined in Section 55(2)(ac) of the Act:
· actual cost of acquisition; or
· lower of (i) fair market value (FMV) of such share on 31 January 2018 (highest quoted price) or (ii) full value of consideration as a result of transfer.
The term FMV, in the context of equity shares, has been defined in section 55(2)(ac) of the Act, as follows:
· In case the equity share is listed on any recognized stock exchange, the highest price quoted on such stock exchange as on January 31, 2018;
· Where the equity share, is not listed as on January 31, 2018 but is subsequently listed on the date of the transfer, an amount which bears to the cost of acquisition the same proportion as the CII for the financial year 2017-18 bears to the CII in which the asset was held by the tax payer or for the financial year 2001-02, whichever is later.
On a literal interpretation of the wordings in section 55(2)(ac) of the Act, one may find it difficult to contend that the equity shares in B Ltd have been acquired prior to February 1, 2018. Hence, technically, the grandfathering benefits may not be available in case of the equity shares in B Ltd.
Given the above, one could argue that the FMV of the equity shares in A Ltd as on January 31, 2018 should be adopted for determining the proportionate FMV of the shares in A Ltd and B Ltd. However, adopting the grandfathering benefits for shares in B Ltd is not free from litigation.
The writer is Partner, Deloitte India
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