The Central Board of Direct Taxes (CBDT) on Friday released draft methodology for arriving at the fair market valuation (FMV) of the unquoted shares (shares of unlisted entities) involved in a transaction for the purpose of taxation. This will bring the rules in line with the amendment made in the Finance Act, 2017.
Under the extant rules, if a person receives jewellery, artistic work, shares and securities for inadequate consideration, FMV of the same is taken into account for computing taxable income. Similarly, for immovable property, the stamp duty value is taken into consideration for determining taxability. However when these assets are received as underlying assets of unquoted equity shares of company, the book value (and not the FMV / stamp duty value) is taken into consideration for determining the value of such shares.
The amendment provides that if consideration for transfer of unquoted equity share of a company is less than the FMV, the FMV will be considered for the purposes of computing income under the head “capital gains”, the board said in a statement. The amendment will come into effect from April 1, 2018.
“The valuation norms for unquoted shares is proposed to be changed radically – from a book value basis to a fair value basis. Accordingly, any transaction in unquoted shares will now have to be carried out at its fair value and if done at lower than this, both buyer and seller will be liable to additional tax based on fair value,” Abhishek Goenka, partner and leader of direct tax at PwC said.
To change this, CBDT has proposed to change the rules for arriving at the FMV of unquoted shares by taking into account the FMV of jewellery, artistic work, shares & securities and stamp duty value in case of immovable property and book value for the rest of the assets, the board said.
“Applying a fair value basis for unquoted shares instead of book value will create subjectivity, particularly for businesses where business models are unique and untested,” Goenka said. He said he hoped the amendment is not made retrospectively from April 1, 2017. The board has sought comments for from the stakeholders by May 19.