Govt likely to tax companies on forfeited share money

Written by Surabhi Rastogi | Surabhi | New Delhi, Jan 27 | Updated: Jan 28 2008, 06:48am hrs
India Inc may soon have to pay tax on capital income that arises for companies from money forfeited as part-payment for their shares.

At present, for subscribing to the share capital of a company, payments can be made in installments by an investor.

For instance, if investors apply for shares, they pay in part and are allotted the shares. But the investors have to pay the remaining amount by a stipulated date.

Any delay will mean forfeiting of the earlier installments by companies. The forfeited money remains with a company and is neither returned to shareholders nor to any government authority.

Companies also do not pay tax on this money, claiming it to be a capital receipt. Tax authorities feel the money should now be taxed because it is not earned through productive activities of companies.

A proposal to this effect has been circulated by the income tax department and is likely to be taken up by Budget 2008-09. To make companies pay tax on forfeited money required an amendment to Section 2(22) of the Income Tax Act, 1961, which deals with dividend income of companies.

This Section can be amended to include the amount of share money forfeiture within the scope of income, a government official pointed out, adding that, in many countries, such capital income is already being taxed.

The proposal has been made at a time when more and more companies are gong in for listing shares on the domestic bourses and retail investments in the country are at an all-time high. The move would also go a long way towards filling the government coffers. Corporate tax rose 37.22% to Rs 1,32,948 crore until January 15.

It also comes at a time when tax concessions to the corporates are on the governments radar, especially in view of the sectors stellar performance.