31.1 At present, section 50D of the Act provides for considering ‘fair market value’ of a capital asset as the full value of consideration accruing on transfer where the consideration is not ascertainable or determinable.
31.2 However, where there is an ascertainable consideration, it is considered for Capital Gain. There is no requirement to see whether the sale is at fair value. Thus people can receive the consideration partly by cheque and partly by cash and avoid tax. For transfers of immovable property Section 50C provides that the stamp duty value to be the minimum value of consideration. There is no such provision for other assets.
31.3 The Finance Bill 2017 proposes a new Section 50CA which prescribes that where the sale consideration for unquoted shares is lower than the fair market value, the fair market value will be considered as the full value of consideration.
31.4 The fair market value will be as prescribed by the Government. At present, there is a fair market value prescribed for unquoted shares under Rule 11UA. However, these values are prescribed for different purposes (e,g, gift). We need to see if the Government continues with the same formula or adopts a different one for Section 50CA.
31.5 Further, Section 50CA provides for a definition of quoted shares as follows:
“A share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business.”
All shares other than quoted shares as defined above would be covered under the provision of Section 50CA. Therefore, it should be noted that even listed shares where transactions are not happening frequently will be termed as unquoted shares. There is no objective criteria for determining regularity of such transactions and decision of what constitutes unquoted shares may lie at the discretion of the tax officer.
31.6 It should be noted that while this provision sets the minimum sales consideration taxable in the hands of the seller, Section 56 provides for the minimum value that will be taxable in the hands of the receiver. This can create taxation of the same amount in both the hands of the seller and the buyer.
Say Mr. A sells 100 shares of Co. XYZ, a private company, to Mr. B. The shares are transferred at a consideration of Rs. 10 per share. However, the fair market value of such shares is Rs. 2,000. Therefore, the difference between sales consideration and fair market value will be taxed in the following manner:
Mr. A, the transferor, will be taxed under Section 50CA on the difference of Rs. 199,000 (Rs. 2,000 less Rs. 10, i.e., Rs. 1990 x 100 shares).
Mr. B, the transferee, will be taxed under Section 56(2)(x) (proposed in Finance Bill 2017 and covered in para 31.3) again on the difference of Rs. 199,000 as he has received the shares at a value lesser than the fair market value.
While for Mr. B, the cost of shares will be jacked up to Rs. 2,000 per share (for subsequent sale); Mr. A will suffer a tax even though he has received monetary value of only Rs. 10 per share. While there is double tax, the taxability is on two different tax payers with the assumption that both have received an undue benefit which has now been made liable to tax.