Krishna 01 May 2023

Tax implications on delisting of tata motors adrs

I am a non-resident foreign national with OCI, I live and work abroad (with no taxable income in India). Sometime back I had bought some shares of Tata Motors ADRs. As everyone must be knowing Tata Motors is currently in the process of Delisting the ADRs from the New York Stock Exchange. As an ADR holder I have been given 2 options: a. Open DR-Type DMAT account and surrender ADR shares to Citibank and request delivery of the underlying Ordinary Shares to a DR-type DMAT account with a brokerage firm in India. I have until July 24, 2023 to surrender your ADSs and obtain delivery of the ordinary shares. b. If I do not surrender your ADR shares prior to (July 24, 2023), the Depositary will sell the underlying Ordinary Shares and distribute the net proceeds of the sales to the remaining ADS holders (after conversion into U.S. dollars), less fees and applicable withholding taxes, pursuant to the Deposit Agreement. Local equity share custodian Citibank, N.A. – Mumbai will apply Indian withholding tax at the maximum rate of 40% plus applicable rate of surcharge and cess (effective rate of approximately 43.68%) on the gross proceeds. The said withholding taxes will be deposited to the credit of the Government of India. As a “non-resident foreign national with OCI and no taxable income in India”, My question is: 1. Would I have to pay capital gains tax, if I sell it immediately as soon as I get the Ordinary Shares? 2. If Yes, what is considered the my base cost, the price of tata motors ordinary shares on the date I got converted at or the price of tata motors ordinary shares on the date it got delisted from NYSE? 3. Is it true that long-term capital gains on shares listed on a recognized stock exchange in India are exempt from tax in India, provided securities transaction tax (STT) has been paid? 4. Is it true that if I sell the ordinary shares of Tata Motors Limited after holding them for more than 12 months, I will not have to pay any capital gains tax in India, provided STT has been paid on the transaction. 5. Are there any other Indian Tax liabilities, that I should be aware of? I have attached delisting Notice and FAQ provided by Tata Motors

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T. Kalaiselvan, Advocate (Advocate) 02 May 2023

1. Since it is a capital asset, the applicable capital gains tax have to be paid.

2. The value for computing the capital gains tax may be assessed as on the date you have acquired the shares

3. Section 10 (38) of the Income Tax Act, 1961. As per this section, the long-term capital gains (LTCG) arising on sale of equity shares or units of an equity-oriented mutual fund on which Securities Transaction Tax (STT) is paid was exempt from taxation. But this removed by introducing section 112A . Following the abolition of the exemption under section 10(38), the said section was established in Budget 2018. It is effective beginning with the fiscal year 2018-19. It provides for a 10% tax on long-term capital gains on listed stocks that surpass a Rs.1 lakh threshold. The schedule for Section 112A of the Income Tax Act, which requires the taxpayer to fill out the scripwise data of securities sold during the year, is included in the income tax form.

4. The above answer suits this question too.

5. When a new clause or policy is added to a law, certain persons may be relieved from complying with the new clause.

The concept of grandfathering in the case of LTCG on sale of equity investments works as follows:

A method of determining the Cost of Acquisition (COA) of such investments have been specifically laid down as per the COA of such investments shall be deemed to be the higher of:

The actual COA of such investments; and
The lower of-
- Fair Market Value (‘FMV’) of such investments; and
- the Full Value of Consideration received or accruing as a result of the transfer of the capital asset i.e. the Sale Price.

Further, the FMV would be the highest price quoted on the recognised stock exchange on 31 January 2018.

In case there is no trading of the said asset in such stock exchange, the highest price on a day immediately preceding 31 January 2018 shall be considered to be the FMV. In effect, the taxpayer can claim the highest price quoted on the recognised stock exchange on 31 January 2018 as the COA and claim the deduction for the same.

The computation mechanism has been further explained by way of the following examples

Capital Gain/ Loss = Sale Price – Revised Cost of Acquisition on 31.1.2018