Overseas off-market deals in 10% tax net

Non-resident companies selling shares in off-market deals will have to pay only a flat 10% tax on long-term capital gains, the Authority for Advance Ruling (AAR) has ruled. The 20% rate demanded by the income-tax department is not in order, it has said. The AAR decision is in sharp contrast to a 2006 ruling by a division bench of ITAT comprising KC Singhal and AK Gorodia, on a similar issue. The bench had said the capital gains tax on such deals is 20%. The AAR, in the order on application by the French firm Timken France SAS, has now ruled that the concessional rate of tax at 10%, available to Indian companies on such transactions, would be also available to non-residents as well. The French company sold its entire stake in an Indian company NRB Bearings in 2005. The shares originally purchased in 1986 were sold to the promoters of the Indian company in 2005 at Rs. 55 crore. According to the Income-Tax Department, residents are allowed a concessional rate of 10% because they have an option of choosing a higher rate of 20% with indexation benefits. Indexation is not available for non-residents, but, there is an inflation protection for non-residents through the provision in the Income Tax Act that allows them to convert the consideration of the sale in the foreign currency-the currency in which they originally purchased the shares. Hence, non-residents are liable to pay capital gains tax at 20%.