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Rashmin Sanghvi & Associates

Chartered Accountants

220, 2nd Floor, Arun Chambers,
Tardeo Road,
Mumbai - 400 034,
Maharashtra, India.

Tel. Nos.: (+91 22) 2351 1878, 2352 5694.

Fax : (+91 22) 2351 5275.

Email : [email protected]

 
Home Articles Taxation         Share :

Budget 2016Chapter G

Chapter G. Taxation – Removal of ambiguity for some transactions:

14. Tax on distributed income on buyback: [S. 115QA]
 

14.1 When an unlisted company buy-backs it own shares, it is required to pay tax of 20 % on the amount of distributed income (S. 115QA). Tax is payable on the difference between buy back price and the price at which the shares were issued. The shareholder is not liable to tax on Capital Gain earned under buy back. This provision is applicable to companies who buy back shares in accordance with S. 77A of the Companies Act, 1956 – i.e. where the company buys back shares from its own shareholders.
 

14.2 There have been cases where buyback arrangements were made as part of reorganisation under S. 391 of the Companies Act, 1956. Companies Act, 2013 has now been enacted in place of Companies Act, 1956. However the Income-tax Act still refers to Companies Act 1956. Tax payers took a view that if buy back is undertaken under Companies Act 2013, the company does not have to pay tax. The shareholder is liable to tax on Capital Gain. If the shareholder is in Mauritius, due to DTA, there is no Capital Gains tax.
 

Further buy back could happen in tranches and at different prices. Buy back could take place in a scheme of merger where instead of the amalgamating company, the amalgamated company bought back the shares. This gave opportunity of reducing taxes.
 

14.3 To resolve these issues, the government has come out with an amendment. Now, all arrangements for buy-back of shares under any law for the time being in force for companies are covered.
 

14.4 Further, there was no clarity on computation of issue price in cases of mergers and demergers. The finance bill therefore proposes to amend the definition of “distributed income”. Rules for calculating the issue price will be separately prescribed for all situations.
 

The amendments will come in force from 1st June, 2016.
 

15. Capital Gain:
 

15.1 Capital Gain on Unlisted Shares: [S. 112 (1)(c)(iii)]
 

Under the current provisions of the Income Tax Act, Long Term Capital Gain (LTCG) on transfer of unlisted securities by non-residents (not being a company) is taxed at the rate of 10% (instead of 20% for other assets). The definition of “securities” 1 states that such securities should be marketable. Some Courts had taken a view that private company shares are not marketable, and hence not covered under the definition of “securities”. Therefore the lower rate of 10% will not be applicable. The tax will be 20%.
 

The finance bill has clarified that shares of a company not being a company in which public are substantially interested (i.e. private company or public company with very few shareholders) will be eligible for tax rate of 10%.
 

15.2 Capital Gains Relief: [S. 54GB]
 

The current provisions provide for relief to individuals and HUF in case of Long Term capital gain on sale of house property if the gain is invested in small and medium sized business.
 

This budget extends the relief to investment in start-up business. If an individual or an HUF sells a house or a plot of land and uses the sale proceeds to invest in shares of a company which undertakes start-up business, there will be no tax on such capital gain.
 

Following conditions have to be satisfied to avail of the relief:
 

a. The whole of the proceeds are invested in a new company by subscribing to its equity shares.

b. The company should be a start-up company.

c. The company should be incorporated before the due date of filing the return of income.

d. The company should purchase new assets within one year from the subscription of the shares by the individual / HUF. New assets for “small and medium sized companies” mean plant and machinery.

“Computers and software” are not considered as eligible assets for small and medium sized businesses. However for start-ups, assets include “computers and software”. Thus the company can invest in computers and software. For a start-up, computers and software will be the main assets.

e. If all of the funds received on subscription are not utilised by the company for purchase of the new assets within the due date of filing the return, the balance funds need to be invested in a Capital Gain Account with a bank.

f. The person selling the residential property should have at least 50 % voting rights in the company.

16. Taxation of Gold Schemes: [S. 47(viic) & S. 49]
 

India is the largest importer of gold in the world and the imports form a large chunk of foreign exchange outgo for India. To temper the imports, various Governments have introduced different schemes or duties. The present Government has introduced two
schemes –
 

- The Sovereign Gold Bond Scheme is aimed at replacing new investment in physical gold with Government backed gold bonds.

- The Gold Monetization Scheme is for conversion of physical gold held by Indians in to marketable certificates.

 

Both these schemes have not been successful as tax is payable on redemption of the bonds and certificates. To make these Schemes attractive the Government has proposed the following:
 

(a) Any redemption of Sovereign Gold Bonds by an individual would not be chargeable to tax as capital gains. Further, indexation benefit will be available for long-term capital gains earned on transfer by all assessees. The proposal will be effective from AY 2017-18, i.e., incomes earned from 1st April 2016 onwards.

(b) Gold Deposit Certificates will be exempt from capital gains; and interest earned thereon will also be exempt from tax. This relaxation is proposed to be brought in retrospectively from 1st April 2016 and hence will apply from AY 2016-17 onwards.

As a corollary, as capital gains will be exempt from tax, even losses incurred on fall in value of the bonds/certificates will not be available as a set-off against other gains.
 

It should be noted that only capital gains earned on redemption or transfer are exempt. If the Bonds or Certificates are held as stock-in-trade, the resulting profits may be taxable as business income.
 

While these proposals should attract further investment in these schemes, only the future will tell if Indians will move away from physical gold in favour of Government promises in the form of bonds or certificates.
 

17. Non – Compete Fees: [S. 28(va)]
 

17.1 In business, partners / collaborators part ways for various reasons. The partners who want to continue the business may pay an amount to the leaving partner for not carrying out similar activities as continuing partners. It helps continuing partners to do the business smoothly. Such amounts paid by continuing partners are referred to as “Non-compete” fees. Such amounts can also be paid for keeping confidential any know-how, patent, copyright, trademark, etc. by the leaving partners.
 

Non-compete fees are “Capital receipts” and not liable to tax. A few years ago, the law was amended. Therefore now under the current law, non-compete fees are taxable.
 

There is however a disparity in taxability of non-compete fees. Non-compete fees received for not carrying out business activity is taxable as business income. Non-compete fees paid in relation to professional services are not covered.
 

To bring parity between both types of incomes, non-compete fees received for not rendering professional services will also be taxable under the head “Income from Business and Profession”.
 

17.2 Transactions can be undertaken in various manners. Instead of having an arrangement of non-compete fees, one can have an arrangement where the leaving partner can “sell” his “right to do business”. The “right” is a capital asset. In such a case, the sale of such a right is Capital Gain.
 

It is clarified that non-compete fees in case of professional services which amount to Capital Gain, will be taxable as Capital Gain. Cost in case of such gain will be considered as NIL. This proviso is similar to that for business.
 

Whether the transaction is for payment of no-compete fees or sale of rights, depends on facts of the case.