What is the correct tax treatment of “sweat equity” shares issued to individuals in lieu of services rendered for both the company issuing the sweat equity shares and the recipient of the sweat equity shares?
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
The term “sweat equity shares” is not commonly used in the RSA. It is my understanding that 'Sweat equity shares' are such equity shares, which are issued by a Company to its directors or employees at a discount or for consideration other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.
From the information provided it appears to be an equity instrument that was acquired by the taxpayer by virtue of his or her employment or office of director of any company. Section 8C(1)(a)(i) would therefore apply and, if the equity shares are not restricted instruments, the gain will be included in the gross income of the individuals and will be remuneration subject to employees tax.