Block Deals Are Abuse Of Public Trading Platform For Tax Avoidance

Block Deals Are Abuse Of Public Trading Platform For Tax Avoidance

The stock exchange might have reasons to put through such transactions through its platform mainly to inform the public of such large trade but the tax authorities should not turn a blind eye to this farce

S MurlidharanUpdated: Wednesday, July 03, 2024, 03:19 AM IST
article-image
Representative Pic | File

Block deals are defined by the National Stock Exchange (NSE) as those involving trading of at least five lakh shares of a specific company or shares of a specific company commanding a value of Rs 5 crore or more. They are consummated during the limited time 9.15 AM to 9.50 PM before public trading starts. The price has to be within 1% range of the previous day’s closing quotation. It is common for company promoters transferring their entire or part of the holdings in a listed company to resort to block deals.

It would be apparent that these are essentially private deals with the two sides having already agreed to the quantity to be traded, the rate and the total price. An elaborate farce is enacted on what is admittedly a public trading platform — let us sit across the table with our laptops on and at 9.15 I will offer and you will buy pronto. One may wonder what is wrong with this arrangement. What is wrong is a public trading platform is abused to avoid capital gains tax. Earlier, the entire long term capital gains from a listed share were tax-free. Now it is subjected to a concessional flat rate of 10% tax if it is in excess of Rs 1 lakh during the relevant financial year in aggregate ie, from all such transactions and not from a specified scrip. Still, the rate is soft given the fact otherwise the tax on transactions put through outside a recognised stock exchange in India is 20%. In other words, promoters get to save a cool 50% of the normal tax applicable by perching themselves on the stock exchange platform to consummate what is essentially a private deal.

To be sure, as soon as the offer is made, anyone can accept it during the specified time allotted so long as there is no counter offer and the original offer is accepted in toto but this never happens as everything goes on as per the preplanned script. In any case, even if someone else spots the offer, he cannot take a call in 35 minutes given the hugeness of the transaction. In the event, it has always been a private deal executed on a public platform with a view to reducing one’s tax liability.

The stock exchange might have reasons to put through such transactions through its platform mainly to inform the public of such large trade but the tax authorities should not turn a blind eye to this farce. The law must be amended to make the seller cough up the tax applicable to private deals. All the more so because when a small investor gets public offer from a person taking over a company, he is asked to pay tax at the rate applicable to private deals. Under the SEBI takeover regulations, a person who alone or acting in concert with others acquires 25% or more of the shares of a company, he has to make an offer to the public to acquire from them at least 26% of the shares in addition at the same rate he bought usually from the exiting promoter. Usually, such price is attractive but the taxman spoils the party for the small investor. If the taxman can wink at the block deals happening under his very nose, he must also indulge the public offer made to small investors admittedly outside the public trading platform. It is strange that this palpable discrimination has been going on for decades with the Parliament not bestirring itself to end it. The story is invariably the same in any friendly takeover — the existing promoter and the new one stepping into his shoes performing an elaborate charade across the table wink-wink nudge-nudge and laughing all the way to the bank.

More fundamentally, one wonders why long-term capital gains earned from listed shares should be cossetted with a soft tax when a salaried person has to cough up a 30% tax on income in excess of Rs 10 lakh. The huge concession comes without any conditions like rollover of the long-term capital gains into the share market. To wit, long term capital gains from a residential property is exempt from tax on the condition that it is rolled over or ploughed back into another residential property within the specified time. Why no such roll-over stipulation hasn’t been made in the context of shares?

The Direct Taxes Code envisaged by the UPA government with P Chidambaram at the helm of the finance ministry swore by an admirable refrain — income is income and all income would be taxed at the same rate. This is as it should be. In fact, there is a case for discrimination against unearned income like enormous and mind-boggling endorsement fees for brands, advocate fee reportedly in the region of Rs 1 crore per appearance and film stars’ fees of Rs 100 crore per cinema and so on.

A salaried person pays tax through his employer who deducts tax at source not at an ad hoc rate as for professional fees but at the actual rates applicable to the employee. Yet, his returns are subjected to intense and microscopic scrutiny by the software while leaving the businessman’s returns severely alone assuming he files one. Time the taxman stopped targeting sitting ducks and started targeting the hitherto hard-to-tax categories. One hopes the new government at the centre takes a wholesome relook into horizontal inequity bedeviling our tax regime.

S Murlidharan is a freelance columnist and writes on economics, business, legal and taxation issues

RECENT STORIES

Indian Railways Not In The Driving Seat

Indian Railways Not In The Driving Seat

Budget Reveals Government’s Long-Term Thinking

Budget Reveals Government’s Long-Term Thinking

Budget 24-25 Heralds Course Correction In The Realm Of Direct Taxes

Budget 24-25 Heralds Course Correction In The Realm Of Direct Taxes

The Budget’s Pragmatic Approach To Farm Economics Is Long Overdue

The Budget’s Pragmatic Approach To Farm Economics Is Long Overdue

Banking Sector In The Budget: The Industry Expected More

Banking Sector In The Budget: The Industry Expected More