In a move expected to make family settlements and transfer of shares more taxing, the government plans to tighten anti-abuse provisions in the Income Tax Act, by including share sales in unlisted companies below fair market value under the ambit of regulations.
So far, income tax was imposed only on individuals or a Hindu Undivided Family (HUF) who received, either free or below market value, property in excess of Rs 50,000. Now, the Finance Bill of 2010-11 has proposed to bring companies and firms that are recipients of such transfers under the ambit of the law.
The amendment will also include bullion under the definition of property, which currently includes shares and securities, land and buildings, jewellery, archaeological collections, drawings, paintings, sculpture or any other work of art.
The market valuation for the unlisted shares would be another task the company would have to achieve now, consultants said. The amendments to the Income Tax Act proposed in the Finance Bill would empower assessing officers to refer a case to a valuation officer.
The amendments related to transfer of shares and bullion to a company and firms will be effective from June 2010.
The Finance Bill has, however, proposed to keep mergers and acquisitions and business reorganisation outside the ambit of the proposed anti-abuse norms.
Tax department officials said the scope of the anti-abuse provisions was being widened because they found companies often sold shares in unlisted companies to other companies at a lower price to set off the losses against profits made from core operations and claim tax breaks.
North Block officials said the move will have implications for large Indian corporate houses that multi-tiered ownership structure.
In addition, tax consultants said that in most family arrangements, promoters transferred shares among themselves at book value, while the market value was higher.
“This is a usual practice and not intended to evade tax. But, now such transactions have been brought under the tax net,” said a professional at a leading consulting firm.
Similarly, cross-border transfer of shares among unlisted companies would also come under the tax net with effect from October 2009.
Tax experts suggest this provision may create complications for companies. “Transfer of shares is often hit by other provisions,” said Ketan Dalal, executive director and joint leader of tax practice at PricewaterhouseCoopers .
He says the new provisions could overlap with cases of deemed dividend tax and, in the case of cross-border transactions, transfer pricing provisions.
# Share transfers below market value in unlisted companies to be brought under I-T Act from June 2010
# Definition of property to include bullion with effect from June 2010
# Cross-border transfer of shares below market value among unlisted companies to also come under the tax net
Currently, for instance, under the deemed dividend provisions, tax authorities are empowered to tax transactions such as loans by closely-held companies to certain shareholders or to entities in which they have a substantial interest.
In the case of loans, the recipient is liable to be taxed on this amount as a dividend, to the extent to which the company has accumulated profits, though the payment may have made as part of normal business activity.
“There might be a case of over-legislation here and the fallout of the provisions could be on genuine transfers which do not have tax avoidance motives,” Dalal said.
“There may be cases where there is a conflict and the tax authorities will have to determine which provision needs to be applied,” added tax consultant R S Sharma.