Tata Motors' restructuring to trigger tax implications for shareholders

Tata Motors' ongoing restructuring will have tax implications for its shareholders. Under the restructuring plan, Tata Motors will cancel its existing ‘A’ ordinary shares and replace them with new ordinary shares.

Meanwhile, under Indian income tax laws, shareholders have to pay capital gains tax on the profit they make when they sell shares they purchased earlier.

While Tata Motors' restructuring would not be seen as a sale of the shares by the shareholder, in tax law, it will be considered analogous to a sale transaction. In other words, as far as taxation is concerned, a shareholder is likely to be seen as having 'sold' the old shares and 'purchased' the new shares, and since any sale of shares is subject to capital gains tax if it results in a profit, the restructuring scheme of Tata Motors is likely to trigger an obligation on the part of shareholders to pay capital gains tax.

That is not all. The accumulated profits of Tata Motors' (over Rs 10,500 crore) may be subjected to a dividend tax, as the new shares issued by the company come with the value of the accumulated profits 'built in'. Therefore, the distribution of the new shares is considered an indirect distribution of these profits (dividend), and subjected to dividend distribution tax.

However, since the accumulated profit is also reflected as capital gains, it is likely that shareholders will be able to deduct the dividend tax from their capital gains tax liability arising out of the restructuring to avoid double taxation.

On a positive note, in case a shareholder decides to sell his or her shares after Sept 1, he or she will not have to calculate capital gains based on their original purchase price, but only on the price of Tata Motors' new shares as issued to them on Sept 1.

In other words, if they had purchased the shares at Rs 500 each three years ago, and they are valued at Rs 550 on Sept 1, then their purchase price will get reset to Rs 550 on Sept 1 due to the restructuring. This will reduce their capital gain, and therefore tax liability, when they sell their shares in the future.

If the new shares are sold within three years of issuance, any gains will be classified as short-term capital gains, which are taxed at a higher rate than long-term capital gains. Conversely, if the shares are held for more than three years, the gains will be taxed as long-term capital gains, benefiting from a lower tax rate and potential indexation benefits.

Tata Motors has provided resources on their website, including an FAQ and an Excel-based calculator, to assist shareholders in assessing their new financial positions.