Is it plain restructuring of shareholding or smart tax planning? That is the question that market observers are asking about a spurt in deals, in which shares have changed hands between different promoters of a company. Last month, the market saw a number of transactions where one promoter transferred stake to another in the same company either through the stock market or in off-market transactions. Some chartered accountants said these could be inspired by the prospect of tax benefits. “Off-market transfer among promoters throws open an arbitrage window, through which one can save tax on gains from sale of assets like real estate properties by transferring shares to a friend or family member when the prices are lower than cost (indexed cost which factors in inflation),” said Vinod Ambavat, partner, Jain Ambavat and Associates. He claims to have carried out tax planning for a client, who made a gain of around Rs 3 crore on the sale of a residential flat. The client was able to reduce his tax liability by transferring his stake in his company to his wife in an off-market transaction and then adjusting the ‘loss’ from this transaction against the profit on the real estate deal.
According to Mr Ambavat, three requirements must be met for such transactions: the shares have to move from transferor to transferee; funds must move from transferee to transferor, and the transaction must be done at the current market price. Recent disclosures to the Bombay Stock Exchange reveal that Bilt Paper Holdings, a promoter company of Ballarpur Industries, acquired 2.1-crore shares, or a 3.8% stake, from another promoter KCT Papers.The shares were bought through open-market purchases on March 23, and the deal does not count as an inter-se transfer. However, PTL Enterprises, Opto Circuits, Phoenix Mills and GG Dandekar Machine Works are among the companies where promoters’ stakes changed hands, although it’s not immediately clear how many of these deals were inter-se transfers. ET could not ascertain from these companies the intention behind the share transfers.
Tax experts say these companies might have done to restructure shareholding among promoter entities and not for the purpose of tax planning. According to Mumbai-based tax consultant TP Ostwal, inter-se transfers among promoters are exempt from the takeover guidelines of market regulator Sebi. “If it is an off-market transaction done without the involvement of a broker, then no securities transaction tax needs to be paid,” said Mr Ostwal. However, such transactions attract long-term capital gains tax, and if there is a capital loss, it can be set off against capital gain from sale of property, he added. Some brokers argue that inter-se transfers are not always done with an intention to save tax. “If one promoter is not in a position to arrange funds needed for some projects, another can relieve him of the financial responsibility by buying his stake in part or in full. Such transactions, however, would attract long-term capital gains tax as promoters’ stake is subject to a lock-in period,” said ST Gerela, CEO of Mumbai-based broking firm Satco Securities and Financial Services. – www.economictimes.indiatimes.com
CAclubindia
