TAX LIABILITY IN AN OPEN OFFER

Submitted to : Mr. Himal Parikh MBA (IIM-A)

Submitted by : Prashant Maharshi

Offer made by the company. A chance for small investors to exit

market by getting a premium on their shares.

This exit route is known as open offer. Generally firms having rich cash, use it to

consolidate their holdings. It is also done to delist shares from the

exchanges. Offer Price should not be less than

average price for the last 26 weeks.

What is Open Offer?

• Short Term Capital Gains Tax Liability

• Long Term Capital Gains Tax Liability

Two types of Capital Gains Tax Liability

If you tender shares in an open offer

You will have to pay tax according to your tax slab

If you tender shares in san open offer

You will have to pay 20% tax with indexation or 10% without it.

If you sell shares in the market

If you sell shares in the market

You will have to pay tax at the rate of 15%

You will not have to pay any tax

• One can tender shares or sell them in the open market.

• If one is confused, then he can simply calculate his tax liability as soon as the share price surges on the announcement of an open offer.

Options for Investors

The Promoter of Company X want to delist it from the exchange and have made an open to the shareholders. Prior to the offer, the shares were trading at Rs. 1,500. The Open offer was made at Rs. 1,650 per share.

The Share price surged by 8% to Rs. 1,620 on announcement of the open offer. Here’s the tax liability for both……..

Mr. Y is perplexed whether he should tender his share holding in Company X in the open offer or sell it in the open market. He falls under the 20% income tax bracket.

Cont.. Lets take an example

Particulars Our Details Mr. Y’s details

a) Date of purchase 10 July 2005

b) Purchase price Rs. 1,000

c) No. of units purchased 100

d) Investment value at purchase price (b x c) Rs. 1,00,000

e) Open offer price Rs. 1,650

f) Investment value at open offer price (e x c) Rs. 1,65,000

g) Short-term capital gains under open offer (f – d) Rs. 65,000

h) Tax liability under open offer (g x tax slab rate, say, 20%) Rs. 13,000

i) Net gain under open offer (g – h) Rs. 52,000

Cont.. As per Short Term (Calculation of Tax Liability)

Particulars Our Details Mr. Y’s details

j) Market price Rs. 1,620

k) Investment value of market price (j x c) Rs. 1,62,000

l) Short-term capital gains under market sale (k-d) Rs. 62,000

m) Tax liability under market sale (l x 15%) Rs. 9,300

n) Net gain under market sale (l-m) Rs. 52,700

Cont.. As per Short Term (Calculation of Tax Liability)

Particulars Our Details Mr. Y’s Details

a) Date of Purchase 10 July 2005

b) Purchase price Rs. 1,000

c) No. of units purchased 100

d) Investment value at purchase price (b x c) Rs. 1,00,000

e) Cost inflation index for purchase year of 2005-06 497

f) Cost inflation index for sale year of 2011-12 785

g) Indexed purchase price (b x [f/e]) Rs. 1,579.5

h) Investment value at indexed purchase price (g x c) Rs. 1,57,947.7

i) Open offer price Rs. 1,650

j) Investment value at open offer price (f x d) Rs. 1,65,000

k) Long-term capital gains without indexation (j – d) Rs. 65,000

Cont.. As per Long Term (Calculation of Tax Liability)

Particulars Our Details Mr. Y’s Details

l) Tax liability without indexation (k x 10%) Rs. 6,500

m) Net gain under open offer without indexation (k – l) Rs. 58,500

n) Long-term capital gains with indexation (j – h) Rs. 7,052.3

o) Tax liability with indexation (n x 20%) Rs. 1,410.5

p) Net gain under open offer with indexation (k – o) Rs. 63,589.5

q) Market price Rs. 1,620

r) Investment value at market price (q x c) Rs. 1,62,000

s) Long-term capital gains under market sale (r – d) Rs. 62,000

t) Tax liability under market sale Nil

u) Net gain under market sale Rs. 62,000

Note – As per the income tax act of 1961, long term capital gains tax for securities is nil only if the securities transaction tax (SST) has been paid when the shares exchange hands. As an open offer transaction is an off-market transaction, no STT is paid. Hence, such a transaction is not exempt from long term capital gains tax.

Cont.. As per Long Term (Calculation of Tax Liability)

THANK YOU