Introduction: Valuation reports play a crucial role in meeting regulatory requirements, particularly in tax matters. This article delves into the necessity of obtaining valuation reports, focusing on their relevance in tax assessments, such as income tax, transfer pricing, ESOP taxation, capital gains, and indirect transfer tax provisions. Furthermore, it explores valuation requirements under accounting standards like IND AS/AS.
– Why to Obtain Valuation Report?
Valuation report is required to meet with the regulatory guidelines. In past we have seen Indian Income Tax Department challenging valuation of Vodafone in Transfer Pricing case. The TPO is questioning on the use of comparables, validation of Business Model, Actual achievement of projected results and what not. Tax valuation is critical in any Deal Transaction as it could lead to huge tax outgo and frivolous litigation.
Income Tax Valuation
– When is Tax Valuation required for Gift Tax?
As per section 56(2) (x) and (viib)of Income Tax Act issue and transfer of shares of companies for nil/ inadequate consideration notional income is subject to tax at Fair Market Value (FMV).
– When is Tax Valuation required for Transfer Pricing?
As per section 92C of Income Tax Act any international transaction between associated enterprises need to be done at Arm’s Length Price. Hence Transfer Pricing provisions has got triggered in case where issue or transfer of shares, business or certain rights (intangibles) is involved and requires Valuation.
– ESOP Employee Perquisite Tax Valuation for the purpose of TDS deduction.
– Valuation for Capital Gain
One side FMV as on 1.4.2001 is required when you have ancestral property!
Secondly Valuation of Capital Gain for the purpose of section 50CA is provision for determination of minimum consideration in case of transfer of unquoted shares.
Thirdly, where in section 50D states that where consideration for transfer of a Capital Asset is not ascertainable, its FMV shall be deemed to be its consideration.
– When is Tax Valuation required for Indirect Transfer Tax Provisions?
Under section 9 of the Income Tax Act income arising from indirect transfer of assets situated in India is deemed to accrue or arise in India. The share or interest is said derive it value substantially from assets located in India, if FMV of assets located in India comprise at least 50% of the FMV of total assets of the company or entity. The computation of FMV of Indian and global assets is to be in the prescribed manner.
– Approaches and Methodologies for Tax Valuation.
The FMV need to be determined in accordance with Rule 11U, 11UA, 11UAA, 11UB, 11UC of Income Tax Rules. The rules have prescribed DCF method for determination of maximum value for issue of shares and Net Assets Value method (at Fair Value) as minimum price for transfer of shares. For Valuation of unquoted shares of an Indian Company, the FMV of shares shall be determined by a merchant banker or a Chartered Accountant in accordance with an internationally accepted valuation methodology.
– Buyback of Shares – Tax, Regulatory and Valuation Aspects?
Buyback is good viable tax effective option in place dividend, Section 115QA of the ITA contains provisions for taxation of a domestic company in respect of buy-back of shares. In effect, the incidence of tax stands shifted completely to the Company and not the recipient of the buyback proceeds. Section 10(34A) of the ITA provided for exemption to a shareholder in respect of income arising from buy-back of shares.
No methodology prescribed for fixing the buy-back price however reference check to Rule 11 UA valuation / Fair Market Valuation principles to be kept in reckoning from a good governance perspective
IFRS/ IND AS/ Accounting Standard Purpose Valuation
(Fair Value concept – IND AS 113)
– Ind AS 16 –Property Plant and Equipment – PP&E
– Ind AS 17 –Leases – Leased Property
– Ind AS 19 –Employee Benefits – Plan Assets
– Ind AS 20 –Accounting for Government Grants – Non-monetary Assets
– Ind AS 28 –Investments in Joint Venture and Associates – Investment in JV or Associate
– Ind AS 36 –Impairment of Assets –Asset/ CGU
– Ind AS 38 –Intangible Assets
– Ind AS 40 –Investment Property
– Ind AS 102 –Share Based Payment – Stock Option and/or Equity Shares
– Ind AS 103 –Business Combination – Identifiable Assets and Liabilities, previous held equity interest, non controlling interest, consideration
– Ind AS 105 -Non-current Assets Held for Sale and Discontinued Operations
– Ind AS 109 –Financial Instruments –All Financial Assets and Liabilities, including unquoted equity investments, derivatives, etc.
– Ind AS 110 –Consolidated Financial Statements – Investment in Subsidiary, consideration received from transaction for loss of control
– Ind AS 115 -Revenue from Contracts with Customers – Non Cash consideration
Company Act Valuation govern by Section 247 always from IBBI Registered Valuer
FEMA Valuation govern Pricing Guidelines
– For issue / transfer of shares by unlisted companies, the valuation of equity instruments must be done by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant as per any internationally accepted pricing methodology for on an arm’s length basis.
– In case of issuance of shares: When a foreign entity invests directly in an Indian company, the RBI mandates valuation of the shares or capital instruments involved. In case of convertible equity instruments (For example: CCPS, CCDs etc.) The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA rules. The valuation certificate should not be more than 90 days old as on the date of allotment of shares. And CA Certificate complied with has to be attached to the form FC-GPR/ FC-TRS filed with the AD bank.
Listed Company Valuation govern by SEBI guidelines
Valuation govern by IBC Code by Registered Valuer
Conclusion: Valuation reports serve as essential tools in tax assessments and financial reporting, ensuring compliance with regulatory guidelines and accounting standards. Whether for tax purposes, including income tax, transfer pricing, or ESOP taxation, or for accounting purposes under IND AS/AS, obtaining accurate valuation reports is imperative for businesses to navigate complex regulatory landscapes and mitigate risks associated with tax outgo and litigation.
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