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Capital gain exemption new

Mihir (Wealth Manager) (5293 Points)

10 August 2013

A new exemption has been brought in place for the purpose of availing exemption in long term capital gains.

U/s 54GB, an individual having long term capital gain from a transfer of residential flat or plot can invest in equity shares (not preference shares) of newly setup small and medium enterprise who will invest in purchasing new plant and machinery. Lock-in period is for 5 years. This scheme is only upto 31st march 2017.

Has anyone availed this exemption? Do we have to purchase equity shares of a SME on the stock market? How to determine that the company will utilise the money to purchase plant and machinery? Is dividend received from the company tax-free? Is this investment safe because the SME could go insolvent if it fails to remain profitable. What happens if SME does not have funds to repay us after 5 years?

Thanks.

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(Guest)

As per section 54GB of the Income Tax Act, if the assessee utilizes the net consideration for subscripttion in equity shares of the Company Engaged in the business of manufacture of article or thing and qualified as Small or medium enterprises under MICRO, Small and Medium enterprises Act, 2006 and after such Investment assessee has more than 50% voting right in such enterprise.

The amount should be utilized by the Company for the purchase of new plant and Machinery which includes office appliances and Vehicles within the period of 1 year from the date of subscripttion.

I think This means that since you will be holding 50%+ shares in that company, YOU will make Important decisions for the company like purchase of plant and machinery and so YOU are responsible for the performance too!

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Mihir (Wealth Manager) (5293 Points)
Replied 10 August 2013

Thanks Madhavi for the reply.

Investment limit in plant & machinery in enterprises under MSME Act :

Micro enterpirses - Not more than 25 lacs

Small enterprises - More than 25 lacs but less than 5 crore

Medium enterprises - More than 5 crore but less than 10 crore

If a person is holding more than 50% voting rights in the company already, how will the company treat this investment made by this person to avail exemption u/s 54GB, whether it would be a capital or a loan? Equity share is a capital but it is also to be repaid by the company to the person after 5 years. If it is a private limited company, how will an equity shareholder sell the shares of the company and the company repays after 5 years. Will it not affect the capital structure of the company after selling the shares? What if the company is unable to profit and cannot repay after 5 years. Either liquidate or pay ltcg tax, right? I don't think the govt thought this through because there are many unanswered questions.

(Guest)

1. The net sale consideration has to be utilized for subscriptttion of equity shares so the investment cannot be treated as loan.

2. This SME has to then, within one year from the date of subscriptttion in equity shares, utilize the amount for purchase of new plant and machinery or in case of non-utilization deposit the money in Capital Gains Account Scheme (CGAS) before due date of filing of return under section 139.

3. It should be a company incorporated in India during the period from 1st day of April of the previous year relevant to the assessment year in which the capital gain arises to the due date of furnishing of return of income under sub-section (1) of section 139 by the assessee. -

So, there are less chances of assessee already owning shares there.

4. I think This section suggests that the assessee should start his own company for this purpose if you look at all the provisions