The tax liability on the acquisition of shares arises on the difference between the consideration and the fair market value (FMV).
The government has amended income-tax rules to ensure that no tax liability arises for a person from receipt of unquoted shares of firms, whose resolution plans have been approved by NCLT. The move is aimed at drawing more investors to participate in rescue schemes of stressed companies, including IL&FS and Yes Bank.
Such receipt of property, including shares and securities, is taxed under section 56(2)(x) of the I-T Act. The tax liability on the acquisition of shares arises on the difference between the consideration and the fair market value (FMV). The Central Board of Direct Taxes (CBDT) changed the rule to exempt the aforementioned cases.
Aravind Srivatsan, partner at Nangia Andersen, said: “A much-needed clarification which brings relief from the unintended tax consequences, which investors would have to factor on recent high profile rescue schemes orchestrated by the government.”
Under the NCLT resolution, a company’s shares are cancelled as the resolution plan comes into force. This is to correctly reflect the worth of the underlying assets. The new shares are then issued, which could be taxed under section 56(2)(x).
For firms, the exemption has also been provided for shareholders who are in receipt of unquoted shares of a company including its tiered subsidiary if central government intervenes to suspend the board of directors and appoints new directors. Besides, it is applicable to the resolution plan approved by the NCLT under section 242 of the Companies Act, 2013..
Experts said that the amended rule would help prevent erosion of investors’ savings on high-profile rescue packages where public interest is involved.