Change impacting funds holding Indian equities | KPMG | GLOBAL

Legislative change impacting funds holding Indian equities

Indian equities

10% tax to Long Term Capital Gains introduced

Legislative change impacting funds

The 2018 Indian Finance Bill, which signalled an intention to introduce a 10% tax to Long Term Capital Gains when announced on 1 February 2018, has recently entered into force with effect from 1 April 2018.

The legislation introduces a 10% tax on Long Term Capital Gains (i.e. holding period of at least 12 months) on the disposition of Indian publicly traded shares and certain other securities after 1 April 2018. Prior to this change, Long Term Capital Gains were exempt from Indian tax, provided securities transaction tax (STT) had been paid.

There are a number of key points to note in relation to this change:

  • For sales of publicly traded shares on or before 31 March 2018, Long Term Capital Gains should be exempt from Indian tax.
  • For sales of publicly traded shares from 1 April 2018, Long Term Capital Gains should be subject to a 10% tax. However, where securities were acquired prior to 31 January 2018, the ‘cost’ of securities in determining the gain will be their fair market value at 31 January 2018. As a result, only capital appreciation since 1 February 2018 should be subject to the tax.
  • There is no indexation relief available to allow for inflation when determining the cost of a security for the purposes of calculating the gain.
  • Any non-resident investor which holds Indian securities as a Foreign Portfolio Investor is required to appoint a local Indian tax agent to compute and pay the tax arising on a self-assessed basis.
  • In the context of Irish regulated funds, it is unlikely that relief for the tax will be available under the Ireland-India Double Taxation Agreement (under which India retains taxing rights in relation to the sale of shares of Indian tax resident companies).

In order to calculate the appreciation that should be subject to tax, transitionary rules provide for an adjustment to the cost of acquisition of the shares. As a result of this, there are a number of circumstances in which formal tax input will likely be required:

  • If publicly traded shares were acquired on or before 31 January 2018, assistance may be needed in determining the appropriate adjusted cost of acquisition pursuant to the methodology prescribed in the rules.
  • If publicly traded shares were sold prior to and/or after 1 April 2018 and resulted in capital losses, assistance may be needed to determine the ability to carry-forward and/or net short-term and long-term losses in order to reduce potential tax exposures.

The Indian Central Board of Direct Taxes has released a Frequently Asked Question document in relation to the change in legislation, the key practical points of which are summarised below.

Summary of key aspects based on an FAQ issued by the Indian Central Board of Direct Taxes

Question Response
What has changed?

Prior to 1 April 2018, gains on the sale of the below securities were exempt from Indian tax, provided they were held for at least 12 months from date of acquisition (i.e. were Long Term Capital Gains) and securities transaction tax had been paid:

  • Equities of Indian companies listed on a recognised stock exchange; 
  • Unit of an Indian equity oriented fund; 
  • Unit of an Indian business trust

From 1 April 2018, Long Term Capital Gains exceeding INR1 lakh on these securities will now be subject to 10% Indian tax, even where securities transaction tax has been paid.

What is the taxing point? Any transfer occurring on or after 1 April 2018.
How is the tax computed? Tax will be applied to the Long Term Capital Gain, which is computed by deducting the cost of acquisition of the asset from the value of consideration on transfer. In determining these amounts:
  • There is no indexation relief available to allow for inflation when determining the cost of a security for the purposes of calculating the gain.
  • If a transfer is at below market value, the fair market value will be imposed as the ‘consideration’.
Are there any grandfathering/transitionary provisions? Yes, there are a number of key transitionary measures to note:
  • If securities were acquired prior to 31 January 2018, the ‘cost’ of securities in determining the gain will be their fair market value at 31 January 2018. As a result, only capital appreciation since 1 February 2018 should be subject to the tax.
  • Any disposals between 1 February 2018 and 31 March 2018 are exempt from the tax.
How is the tax collected? For any non-resident investor which does not hold their investment as a Foreign Portfolio Investor, tax will be deducted at source. However, if a non-resident investor holds their investment as a Foreign Portfolio Investor, they will be treated in a similar manner to an Indian resident investor and will need to compute and pay the tax on a self-assessed basis – in practice an Indian tax agent will need to be appointed to perform this function.