Promoters and private equity investors who have sold their shares via the offer for sale route in IPOs face potential tax challenges as a result of a Budget clarification imposing capital gains tax on such sales.

The central government has actually plugged a key loophole in the capital gains tax rules. Many promoters and investors declared zero capital gains on the grounds that there was no explicit provision for calculation of capital gains in this specific scenario and hence. the sale of shares was exempt from taxes.

Now, the central government has plugged the loophole in the rules with retrospective effect from February 1, 2018, bringing the older deals under the ambit of the clarification.

“Historically, there existed a degree of uncertainty regarding the application of the rules to shares transferred under an OFS that were not listed at the time of transfer but were nonetheless subject to STT. To address this ambiguity, the Finance (No.2) Bill of 2024 proposes an amendment to extend the existing rules for cost of acquisition to include shares disposed of through an OFS during an Initial Public Offering (IPO) and provide for indexed cost of acquisition.”