The Budget 2017-18 announced on 1st February, 2017, contained certain Additional Revenue Mobilisation (ARM) and Anti-abuse Measures in the area of Direct Taxes. This included the proposal to restrict the exemption from long term capital gains in case of transfer of listed shares by providing that the exemption, subject to notification of certain exceptions, shall be available if STT has been paid at the time of acquisition of such shares where they have been acquired after 1st October, 2004.

This measure was taken with a view to curb the practice of declaring unaccounted income as exempt long term capital gain.This was slightly against the existing Income Tax Act provision which exempted the long term capital gains arising in case of transfer of equity shares on or after 01-10-2004, where such transaction is chargeable to securities transaction tax (STT). This raised the multiple concerns among various categories including allot tees of shares issued pursuant to ESOPs, Preferential allotments etc. Taking the example of ESOPs, where in Employees are given a right to obtain the equity shares of the company at a pre-determined price and the employees can acquire shares of the

company either by way of fresh allotment or through transfer of shares from the Trust. In case of fresh allotment, there is no question of paying STT upon acquisition. Even in cases where the listed company takes the Trust Route and the trust acquires shares of the company from secondary market, the STT will be paid when the Trust will acquire shares. However the transfer of shares from Trust to employee will be an off-market transaction. In this manner, employee can never pay STT at the time of acquisition of ESOP Shares-neither in case of fresh acquisition nor in case of Trust route. This prospectively led to dilution of the basic idea of wealth creation and retention of employees by granting ESOPs to them. They will not get any benefit by opting and holding ESOPs for a longer period.

The transfer of shares from Trust to employee will be an off-market transaction, where employee can never pay STT at the time of acquisition of ESOP Shares

Consequently, representations were made to the Government to relook the said provisions. In furtherance to this, the Ministry came up with a Press Release dated 3rd April, 2017, wherein draft of Notifications to be issued under third proviso to the clause(38)of section 10 of the Income-tax Act, 1961, were given and comments/suggestions were sought on the same.

It was the result of such suggestions and representation received by the Ministry, that the Central Board of Direct Taxes has issued another Notification on 5th June, 2017, where it has prescribed the list of transactions that will not be exempted from levy of long term capital gain tax if the Securities Transaction Tax has not been paid at the time of acquisition of such shares as well as the transactions which are exempt from this provision. Thereby a relief has been sought for the various cases including acquisition of shares under Employee Stock Option and Employee Stock Purchase Schemes;

This is undoubtedly a welcome and much needed step which was required by both the natural persons and well the corporates.