30.1 As per the current provisions, if any immovable property, being land or building or both, is held for more than 36 months, it is considered as long-term capital asset. Capital gain on sale is considered as Long Term Capital Gain. Tax rate is lower on such gain. Other reliefs like inflation adjustment and relief for investment in bonds / house property is available to further reduce the tax.
30.2 Finance Bill provides that if any immovable property is held for more than 24 months, it will be considered as long-term capital asset. This is a welcome relief to taxpayers owning land and building. .
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.
32.1 Capital Gains tax is levied on any transaction involving a “transfer”. A “transfer” includes not only sale but also includes exchange, extinguishment, etc. Thus consideration for transfer may be in cash or kind. When preference shares are converted into equity shares, there is an exchange of assets (preference shares are exchanged into equity shares).
There is relief available for conversion of debentures into shares. No capital gain tax is charged. There was no such relief in case of preference shares. Representations have been made to consider preference shares on par with debentures.
32.2 Finance Bill now provides that when a preference share of a company is converted into equity share of the same company, it will not attract Capital Gains tax.
32.3 As a corollary, when the equity share (converted from preference share) is sold, the period of holding of equity share will commence from the date of acquiring the preference share. The cost at which preference shares were acquired will be taken as cost of equity shares [S. 49(2AE)].
33.1 As per the current provisions, in computation of Capital Gains, the cost of an asset acquired before 1st April 1981, can be taken at actual cost, or the fair market value as on 1st April 1981, at the option of the assessee (i.e. whichever is more beneficial to the assessee).
33.2 The base year of 1981 is more than 3 decades old. Practical difficulties are faced by people to obtain Fair Market Value as on 1st April 1981.
Finance Bill has shifted the date to 1.4.2001. Thus the cost of an asset acquired before 1st April 2001, can be taken at actual cost, or the fair market value as on 1st April 2001, at the option of the assessee.
34.1 As stated in para 32.1, any exchange or conversion of a capital asset is liable for capital gain tax. In case of Mutual Fund (MF), Finance Act 2016 had provided that consolidation of plans of mutual funds will not be chargeable to tax. However, corresponding provisions of period of holding the unit of MF and cost of acquisition were not amended.
34.2 Finance Bill therefore provides the following:
i) Period of holding the units of consolidated plan of MF scheme will be considered from the date of acquiring the units before consolidation.
ii) Cost of acquiring units will be the original cost of purchase of units.
This amendment will be effective from FY 2017-18 onwards. However, the main provision exempting such transfers came in to force from last year, i.e., FY 2016-17. It seems to be a lacunae and the Finance Act should ideally correct the date of applicability of this provision.
35.1 To provide relief from tax on long-term capital gain, a deduction up to Rs. 50 lakhs is available, if bonds of REC or NHAI are purchased within 6 months from the date of transfer.
35.2 At present, investments in NHAI or REC Bonds are the only eligible bonds for claiming the relief. Finance Bill provides that investment in any bond redeemable after 3 years and which will be notified by the Central Government, will also be eligible for deduction. Thus more bonds will be notified for the relief.