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Uniform capital gains tax rule for all: Delhi High Court

Residents and non-residents should pay same tax on capital gains from sale of securities, according to a Delhi High Court ruling that is expected to clear the fog on a tax question that foreign companies face.

Long-term gains from off-market sale of securities attract a tax of 10% while a higher rate of 20% is charged after adjusting for inflation. The issue addressed by the court relates to Scotland-based Cairn UK Holdings which was asked to pay 20% tax by the tax office. Cairn UK Holdings faced a claim of around Rs 390 crore for the assessment year 2010-2011 from the tax department for selling shares in its India subsidiary Cairn India to Malaysia's Petronas Corp International.

Cairn UK Holdings had sold 2.29% stake (or, 4,36,00,000 shares) in Cairn India to Petronas for $241,426,378 (approximately,Rs 1,100 crore at the exchange rate prevailing then). Since the share transfer was in off-market mode and not on a stock exchange, a tax of $85,584,251 (approximatelyRs 390 crore) was imposed on the long-term capital gain. Cairn UK Holdings had challenged the Authority of Advance Rulings (AAR), a quasi-judicial body, which ruled that a non-resident investor would not be entitled to the benefit of 10% tax rate on long-term capital gains from off-market sale of listed securities.

The AAR upheld the income-tax department's decision to tax the foreign company at 20%. Cairn UK Holdings had preferred not to avail benefit arising out of indexation (inflation adjustment) and calculated the capital gains tax liability purely on the difference between sale proceeds and cost of acquisition of shares. But, the I-T and AAR took a view that since the company had, for tax purpose, converted the gains from dollar to rupees (based exchange rates prevailing when the shares were bought and sold), it has to pay 20% on the gains (and not 10%).

But the court has ruled that the law for capital gains tax should be the same for residents and nonresidents unless there are strong grounds and reasons for the AAR to take a contrary view.

"There should be consistency and uniformity in interpretation of provisions as uncertainties can disable and harm governance of tax laws," a division bench of Sanjiv Khanna and Sanjeev Sachdeva said.

According to the petition, the concessional tax rate of 10% was applicable on long-term capital gains arising on sale of shares of an Indian company in case the benefit of inflation indexation was not availed. It said that the concessional tax rate benefit is available to both non-residents and residents and that if the legislature intended to restrict the option of concessional benefit to residents only, specific language would have been incorporated to that effect.

Article referred: http://articles.economictimes.indiatimes.com/2013-10-12/news/42968469_1_indexation-long-term-capital-gains-tax-rate

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