Taxing bonds uncovered

2008-03-07 10:30:46            Print Version

By Vijayashree R and Sneha Bhoot


According to the existing income tax provisions, any transfer by way of conversion of bonds of a company into shares/debentures of the same company is not regarded as ‘transfer’ to attract capital gains tax. In the Finance Bill, 2008 the Finance Minister has proposed to include any transfer by way of conversion of bonds into shares/debentures of any company as not being regarded as a taxable transfer. 


This move comes in the wake of the Central Government introducing the Foreign Currency Exchangeable Bonds (FCEB) Scheme.


FCEB and capital gains tax: The proposed amendment in the Finance Bill appears to clarify the tax treatment on conversion of FCEBs into shares. These bonds are expressed in foreign currency, which can be then converted into or exchanged for shares of a group company. It is now proposed by the Finance Minister that the conversion shall not be treated as a transfer to attract capital gains tax.


The Bill also puts forward that the cost of acquisition of shares received on conversion of the bond shall be the price at which the corresponding bond was purchased. This would be relevant at the time of determining the gains on the sale of the converted shares. But neither the income tax provisions nor the FCEB scheme throws light on the computation of these FCEBs in Indian rupees. Clarity on this can be awaited from the revenue authorities.


The proposed amendment in the Finance Bill, 2008 on the determination of cost of acquisition of shares received on conversion is also applicable on Foreign Currency Convertible Bonds (FCCBs). Issue of FCCBs by Indian corporates is governed by the Finance Ministry titled as ‘Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme’ (FCCB scheme). As per the FCCB Scheme, the cost of acquisition of shares is computed by considering the price of the ordinary shares of the issuing company prevailing on the Bombay or National Stock Exchange on the date of advice of redemption by overseas depository bank.


Tax impact:

This mechanism of computing the cost now appears redundant in relation to the proposed amendment in the Finance Bill. It also appears that the proposed change would increase the quantum of taxable capital gains which would affect the tax liability to a greater extent.


Also, the Finance Bill has not proposed any corresponding amendment for determination of the date of acquisition of the converted shares. However, the FCCB scheme provides that the date of acquisition would be the date on which the FCCBs are converted into ordinary shares. But this would create glitch in computing tax on capital gains.


To conclude, even though the changes proposed by the Finance Bill are a welcome move following the introduction of the FCEB scheme there still remains a host of issues that need clarity.

The authors belong to the financial services team of PricewaterhouseCoopers Pvt Ltd.


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