Blogs

Author: CA Yatin Jain
Published On:8th June 2017

Impact of Section 50CA Income Tax Act, 1961

Special provision for full value of consideration for transfer of share other than quoted share.

Where consideration for transfer of share of a company (other than quoted share) is less than the FMV of such shares determined in accordance with the manner to be prescribed, the FMV shall be deemed to be the full value of consideration for computing Capital Gains.

Quoted share - Shares 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

For Example

ABC and Co. (Seller) acquired 10,000 shares of a private limited company at INR 100 per share. The shares were sold by ABC to XYZ and Co. (Buyers) at INR 150 per share. The FMV of the shares on the date of transfer was INR 170 per share.3 The impact of the section 50CA would be as follows.

Particulars

Under Old Provisions

After Amendment

Delta

Sale Consideration

15,00,000

(150 X 10,000)

17,00,000

(170 X 10,000)

2,00,000

{(170-150) X 10,000)

Less: Cost of Acquisition

10,00,000

(100 X 10,000)

10,00,000

(100 X 10,000)

NIL

Capital Gains

5,00,000

7,00,000

2,00,000*

 

*The differential amount taxed on account of introduction of section 50CA in the hands of ABC and Co. (Sellers) amounts to INR 200,000. The said amount is being taxed as a result of increase in sale consideration from INR 15,00,000 to INR 17,00,000.

Impact on Buyer for the amendment in Section 50CA

In order to curb the practice of receiving shares without consideration or for inadequate consideration, it has been proposed to insert a new clause (x) under section 56(2). This section provides for taxability in the hands of the purchaser of shares if the purchase is made without consideration or for consideration less than the FMV of such property. Further, in line with the extant provision of the Act, this provision would only trigger if the difference between the consideration paid and the FMV exceeds INR 50,000. With the introduction of this clause, the scope of the extant provision has been expanded to all the tax payers.

Consequently, clauses (vii) and (viia) of section 56(2) of the Act would not be applicable post 01 April, 2017. Furthermore, in line with the relief available under the extant provisions, amendment has also been proposed to take into account the FMV of the shares as their cost of acquisition in case the provisions of section 56(2)(x) are triggered.

For Example

As per above example, Computation of income from other sources in the hands of XYZ and Co. (Buyers)-

Particulars

Under Old Provisions

After Amendment

Delta

FMV of Shares

17,00,000

(170 X 10,000)

17,00,000

(170 X 10,000)

Nil

Less: Actual Amount for Shares

10,00,000

(100 X 10,000)

10,00,000

(100 X 10,000)

NIL

Capital Gains

7,00,000

7,00,000

Nil

 

From the above example, it may be seen as per the extant provisions of the Act, the amount of INR 200,000 was being taxed in the hands of transferee. However, the section 50CA proposes to tax the amount of INR 200,000 in the hands of transferor. Consequently, the amount of INR 200,000 is being taxed in the hands transferor as well as transferee.

The aim to bring anti-abusive measures is to bring into the tax net the amounts, which avoided tax by way of understatement of full value of consideration. Having said so, the taxation as per sections 50CA and 56(2)(x) may result into incidence of double taxation.

 

Impact on Startups-

The Impact of amendments in Income Tax effects in the whole society, the start-ups going to effect with too as they are in developing stage in industry need to do compliances so at every point of time

 

Start-Ups need investments in way of Loans, Debentures and Share issuance and many of Start-ups shares are not listed anywhere so the shares issue by them are treated to be as the “Unquoted Shares” which curbs the impact of Section 50CA and Section 56(2)(x)

As described earlier, Sections amended w.e.f. April 01 2017 will cause the double taxation in hands of seller as well as buyer for the difference of the amount of FMV and Sales price ( if greater than INR 50,000). Start-ups seeking for the investments need to calculate the FMV of there shares as per the prescribed method as described in Rule 11U(A) for calculation of the values of shares so that the impact of taxation is not doubly tax the income.

Any Income received from the investor in against of the share issued by the company may impact the virtue of the section 50CA and 56(2)(x)

Investor (The Buyer) of shares has also to overlook the amount of investments to be made by him in the start-up by looking the financials of Start-ups for the capital gains by calculating the FMV of shares of the company.

Start-ups have also to quote the number of share allotment needed to make in against of the investments to be done by the investors. Non- Compliance of any of the purview of section of income tax act 1961 is not good for any start-Ups looking for good investors and want to run in long term basis so have to update from each and very update related to compliances which will helps them to run in better way.

Section 50CA and Section 56(2)(x) are in effect, for taxability of the differential amount, greater than the INR 50,000 , between FMV and Sale price of the unquoted shares which will helps in reducing  window dressing of the investments amount or routing the way of investors amounts to come in startups.

So the main motive of amendment is to lower the practice of tax evasion by application of the taxes on the amount twice if in case it’s intentionally done.

 

In case of any query, please write E-Mail at compliance@startupbuddy.co.in