• Share Swap Capital Gains Tax between listed and unlisted Indian companies

1. A bse listed company

Share capital of 10 crore with 1 crore shares of face value 10.

Current market cap 250 cr.

2. A Pvt Ltd company.

Pvt ltd company with 83L capital with 8.3L shares of face value 10.

With reserve and surplus, book value will be 18 i.e 1 crore 49 lakh and 40 thousand.


3. Proposal is that listed company will make pvt ltd company as their 100% subsidiary and give 10% stake of listed company to share holders of pvt ltd company.

4. Question-1 - Since this is a swap transfer with 100% subsidiary, what is the tax implication, when does pvt ltd company shareholders have to pay the tax ? When this swap happens or in future, whenever they sell the shares of listed company ? 

5. Question-2 - listed company says it will make its valuation to 50cr and and then do the swap which means pvt ltd company share holders will get 5cr shares of listed company in swap of their 83L capital. 
 A) Is this possible that listed company can bring its valuation to 50cr or they have to do valuation as per market cap only and then do the swap ?
 B) In this case, pvt ltd company shareholders will have to pay tax on 5cr- 83L or on 5cr - 1.5cr (book value of 18) and tax will be at 12.5% right ?


6. Please advise on tax implications as per norms
Asked 17 days ago in Capital Gains Tax

 

  • When is Tax Payable?

    • Tax liability arises at the time of the swap (transfer event), not when listed company shares are sold later.

  • Tax Calculation for Pvt. Ltd. Shareholders:

    • Capital Gains = FMV of listed company shares received - Cost of acquisition.
    • Cost of acquisition = Higher of ₹83L (original capital) or ₹1.5cr (book value).
    • Gains are taxed:


      • LTCG (if held >24 months): 20% with indexation.

      • STCG (if held ≤24 months): Taxable at slab rate.

  • Valuation Rules for Listed Company:

    • Listed company cannot arbitrarily set valuation at ₹50cr. FMV must follow SEBI guidelines (based on market cap).

  • Regulatory Compliance:

    • Proper valuation reports for both companies are mandatory under SEBI and Companies Act to validate the swap ratio.

 

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Shubham Goyal

Shubham Goyal
CA, Delhi
354 Answers
7 Consultations

Applicability of Section 47(iv) and (v)

  1. Section 47(iv) and (v) Scope:

    • Exempt transfers of capital assets between parent and subsidiary companies.
    • Do not apply to shareholder-level transactions like share swaps.

  2. Your Case:

    • The listed company acquiring 100% of the Pvt. Ltd. company qualifies under Section 47(iv), but shareholders exchanging shares are not covered.
    • Share swap by Pvt. Ltd. company shareholders is treated as a transfer for capital gains tax.

  3. Tax Implications for Shareholders:

    • Capital Gains = FMV of listed company shares received - Cost of acquisition of Pvt. Ltd. company shares.
    • Tax is payable at the time of the swap.

  4. Conclusion:


    • Section 47 exemption does not apply to shareholders. Capital gains tax applies to the swap.

 

For detailed, personalized advice, consider a phone consultancy.

Hope you find the information helpful. You are free to contact me for further discussion.If you could spare two minutes of your time to write a review, It would be really grateful and very happy to read it.

Thank you.

Shubham Goyal

Shubham Goyal
CA, Delhi
354 Answers
7 Consultations

Please find below answers

 

a) In the given case in the hands of owner of private limited shares taxability will trigger at the time of swap transaction takes place. Tax liability shall fall under capital gain - long term / short tern subject to their holding period in private limited company

 

b)

i) Valuation under 11UA need to work out for the listed company under income tax act and for the purpose of companies act listed value need to consider after giving effect of peer companies and market premium position as issued by registered value. As per my understanding it is difficult to get the valuation of 50 Crore with company having market cap of 250 Crore, however it will depends upon the balancesheet of the listed company, but in either case merchant banker report on valuation of shares will play key role since its mandatory requirement

 

ii) so effectively private limited company shareholder shall pay tax on sales value (5Cr / 25Cr - Depends upon final valuation report) Less Purchase cost of share i.e. Rs. 10 Per share and difference shall be subject to STCG or LTCG

 

Section 47(iv) & (v) shall not apply in given case since holding and subsidiary relation do not exist at the time of transaction execution, that relationship will arise only once this transaction is executed so you can fall under this section for future transactions only

 

However there can be better way to route this transaction to nullify or defer tax liability making sure there is no effective tax implication in the hands of private company shareholder through route of CCPS

Vishrut Rajesh Shah
CA, Ahmedabad
943 Answers
39 Consultations

Question 1: Tax Implications of the Swap Transfer

Scenario:

  • Shareholders of the private limited company are offered a 10% stake in the listed company in exchange for 100% ownership of the private limited company.

Taxation for Shareholders of the Private Limited Company:

  • The swap of shares is considered a "transfer" under Section 2(47) of the Income Tax Act, 1961, and is taxable under capital gains provisions.
  • However, as per Section 47(vii), if shares are exchanged in a scheme of amalgamation or reorganization, the transfer may not be taxable at the time of the swap.

When Tax Becomes Payable:

  1. At the Time of Swap:

    • If the transaction qualifies under Section 47, no tax is payable at the time of the swap. The capital gains will be deferred until the shareholders sell the listed company’s shares in the future.
    • If the transaction does not qualify under Section 47 (e.g., if it doesn’t meet the conditions for tax-neutral amalgamations), the gain is taxable in the year of the swap.

  2. At the Time of Selling the Listed Company Shares:

    • When shareholders of the private company sell the shares of the listed company in the future, the capital gains tax will apply based on the sale consideration and the cost of acquisition (determined as per the swap value).
    • The holding period for determining short-term or long-term gains will start from the date the listed company’s shares are allotted.

Question 2: Valuation and Tax Implications

A. Can the Listed Company Reduce Its Valuation for the Swap?

  • A listed company cannot arbitrarily bring down its valuation to ₹50 crore when its market cap is ₹250 crore. Valuation must adhere to the following:


    1. Fair Market Value (FMV): The valuation should align with SEBI (Substantial Acquisition of Shares and Takeovers) Regulations or other valuation norms mandated for listed companies.

    2. Independent Valuation Report: For such transactions, independent valuation reports are required to establish a fair exchange ratio.

If the listed company undervalues its shares, it could attract scrutiny from SEBI and tax authorities for compliance breaches.

B. Tax Implications for Private Company Shareholders
Taxable Gain:

  • The gain will be determined as the difference between the FMV of the listed company shares received and the cost of acquisition of the private company shares.

  1. Cost of Acquisition:

    • If the book value is ₹18/share, the total cost of acquisition for 8.3 lakh shares is ₹1.5 crore (₹18 x 8.3L).

  2. FMV of Shares Received:

    • If the listed company issues ₹5 crore worth of shares, this becomes the deemed sale consideration.

Tax Calculation:


  • Capital Gain = Sale Consideration - Cost of Acquisition


    • Case 1: ₹5 crore - ₹83 lakh (paid-up capital only)

    • Case 2: ₹5 crore - ₹1.5 crore (book value, including reserves)

The applicable cost will likely be ₹1.5 crore, considering book value, but further clarity is needed based on transaction terms.

Applicable Tax Rate:

  • If shares of the private company are held for more than 24 months:


    • Long-Term Capital Gains (LTCG): Taxed at 20% with indexation benefits.

  • If shares are held for 24 months or less:


    • Short-Term Capital Gains (STCG): Taxed at the applicable income tax slab rates.

The 12.5% tax rate is not applicable here—it likely refers to concessional rates for certain specified assets under older provisions.

Final Advice on Tax Implications and Compliance Norms

  1. Valuation Standards:

    • The listed company must adhere to valuation norms, ensuring the swap ratio is based on FMV. Arbitrary undervaluation is not permissible.

  2. Tax on Shareholders:

    • If the swap qualifies under Section 47, there is no tax liability at the time of the swap, but shareholders will pay tax when selling the listed company’s shares.
    • If it doesn’t qualify under Section 47, shareholders will pay capital gains tax in the year of the swap based on FMV.

  3. Consult Professionals:

    • Engage a Chartered Accountant or legal advisor to ensure compliance with SEBI, FEMA (if applicable), and tax regulations.

Let me know if you need further clarification or assistance with specific calculations or drafting agreements for this transaction!

 

Damini Agarwal
CA, Bangalore
460 Answers
31 Consultations

 

Yes, Section 47(iv) and Section 47(v) of the Income Tax Act, 1961, may apply to your case if certain conditions are met, making the transfer of the capital asset exempt from capital gains tax. Let’s analyze their applicability:

Section 47(iv) Applicability

This section provides an exemption for transfers of a capital asset by a company to its subsidiary company, provided:


  1. Whole Share Capital Held:

    • The parent company or its nominees must hold 100% of the share capital of the subsidiary company post-transfer.
    • In your scenario, the listed company would need to hold 100% of the private limited company's shares.


  2. Subsidiary is an Indian Company:

    • The private limited company must be an Indian company, which is the case here.

If these conditions are satisfied, the transfer of the private company’s shares to the listed company would qualify for exemption under Section 47(iv), and no capital gains tax would be payable on this transfer.

Section 47(v) Applicability

This section provides an exemption for transfers of a capital asset by a subsidiary company to its holding company, provided:


  1. Whole Share Capital Held:

    • The holding company must hold 100% of the subsidiary’s share capital.


  2. Holding Company is an Indian Company:

    • The listed company must be an Indian company.

In this scenario, Section 47(v) would apply if the private limited company transfers any capital asset to the listed company, provided the conditions are satisfied. This would also result in no capital gains tax on the transaction.

Your Case

  1. Nature of Transaction:

    • Shareholders of the private limited company are receiving shares of the listed company in exchange for their private company shares, making the private company a 100% subsidiary of the listed company.
    • After the transaction, the listed company will own 100% of the private limited company.

  2. Exemption Applicability:

    • If the transaction satisfies the conditions under Section 47(iv), the transfer of shares from the private limited company’s shareholders to the listed company will be tax-exempt.
    • At the time of the swap, no tax is payable by the private limited company’s shareholders.

Future Tax Implications

  • Although Section 47(iv) or (v) exempts tax at the time of transfer, it does not eliminate tax when the shareholders sell the shares of the listed company in the future.
  • The cost of acquisition of the listed company’s shares will be deemed to be the cost of acquisition of the private limited company’s shares, as per Section 49(1).

For example:

  • If the cost of acquisition of the private limited company’s shares is ₹1.5 crore (book value), this cost will apply to the listed company shares received in the swap.
  • Capital gains tax will apply when the listed company’s shares are sold, based on the sale price and the cost of acquisition carried forward.

Conditions to Note

  1. Genuine Business Purpose:

    • The transaction must not be considered a means to avoid taxes. Ensure documentation justifies the reorganization for business purposes.

  2. Stock-in-Trade Exception:

    • Section 47(iv) and (v) do not apply if the capital asset is transferred as stock-in-trade. Ensure that the private limited company’s shares are treated as a capital asset, not trading stock.

Conclusion


  • Exemption at the Time of Swap: If conditions under Section 47(iv) are satisfied, the transfer is exempt from tax at the time of the swap.

  • Future Tax Liability: Tax will arise when the shareholders sell the listed company’s shares, and the applicable rate (LTCG or STCG) will depend on the holding period and the cost of acquisition.

Damini Agarwal
CA, Bangalore
460 Answers
31 Consultations

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