Listed share acquisitions: Govt weighs relief to shield deals from tax volatility

To address this, companies want a threshold for valuation change or a defined safe harbour period, similar to those currently applied to immovable property, during share acquisitions.

The government is weighing changes to acquisition rules for shares of listed companies to address industry concerns over tax liabilities arising from volatility in stock prices between the announcement of the deal and execution, according to people familiar with the development.

Industry representatives have appealed to the government to either relax valuation norms used for tax calculations or introduce a safe harbour period within which the agreed valuation of the deal would be maintained. Under the current income tax law, if shares are acquired below their fair market value (FMV), the difference is taxed as income from other sources at the buyer’s applicable income tax slab rate.

The industry contends that introducing a safe harbour provision would establish a predefined window within which fluctuations from fair market value (FMV) would not trigger additional tax liabilities or disputes, offering protection and certainty even if there are minor market-driven price variations.

Safe harbour provisions, however, currently cover immovable property transactions, allowing a 10 percent deviation from the stamp duty value without triggering tax liability, and certain transfer pricing cases involving international transactions. Industry executives have suggested the same could be introduced for listed share acquisitions.

A senior government official said that the matter is under consideration. “There are some provisions and rules, and the industry has made a request to relax them. Some adjustments we will work upon. The issue is that today, some agreement is entered upon at some value, then the company is listed, and on listing, it reflects some other value. The transaction happens at another value. Some safe harbour against some period is the demand,” the official said, requesting anonymity.

Tax implications under current law

Under the Income Tax Act, 1961, Section 56(2) (x) governs the taxation of transactions involving shares, treating the difference between the fair market value (FMV) and the acquisition price as “income from other sources” if the acquisition price is lower than the FMV. Effectively, this imposes a tax akin to a gift tax on the difference.

Industry experts argue that the existing provisions fail to account for the natural price fluctuations that occur in the market during the time between announcing and closing a deal. The price at which the deal is announced may differ significantly from the execution price due to market movements, creating uncertainty over which value should be used for tax calculations. No tax liability arises under Section 56(2)(x) when the acquisition price is higher than the FMV.

“Industry is seeking either a threshold for the difference in valuation above which tax liability should apply or a safe harbour in terms of a time period or valuation difference of, say, 10 percent. Currently, safe harbour is only there for immovable property,” said Anil Talreja, Partner, Deloitte India. The industry is essentially proposing that tax liability under Section 56(2)(x) should not apply unless the difference between the acquisition price and the fair market value (FMV) exceeds 10 percent.

Talreja added that the request aims to address a practical challenge that arises in deal-making. “There is generally a time lag between announcing/signing and closing a deal, which can result in heavy price fluctuation and potential tax liability. Being a practical issue, this comes up in several deal discussions within the set factual framework on each such deal,” he said.

Industry representatives have suggested that the government consider linking the valuation under Section 56(2)(x) to the date of signing the agreement rather than the execution date. This would provide greater certainty for companies and investors while avoiding potential disputes with tax authorities over fluctuating market prices.

“Why not link the price to the date of signing the agreement rather than the date of share transfer? This would remove the uncertainty arising from price fluctuations during the interim period,” Talreja said.

Binoy Parikh, Executive Director at Katalyst Advisors, “As an immediate measure, CBDT should clarify that the said price for deemed taxation should be reckoned as on the signing date and not when the shares are actually acquired post the open offer. Assume that the market price as on the signing date, say April 1, 2025, is RS 100, and the transaction price is Rs 110. Open offer obligations are concluded on say June 30, and if the price runs up to Rs 120, then the difference of Rs 10, being the difference between Rs 110, being the transaction price and Rs 120, being the market price when the shares will be acquired could be taxed at the applicable rates in the hands of the acquirer.”