Busi n e s s i n di a u t h e m aga z i n e of t h e cor por at e wor l d
Guest Column
u 72 u j u n e 5 -18, 2 017
B
enjamin franklin famously (and alleg- edly) said “the only two certainties in life are death and taxes.” with the spec- tre of inheritance tax (or estate duty) continu- ing to loom, taxes on death may soon become the third.while inheritance tax is a key driver, other concerns, such as avoiding family disputes, ring- fencing assets from legal issues, setting family protocols and ensuring wealth is not fragmented, has led to taxpayers seriously considering succes- sion planning through a private trust set up for family members’ benefit. depending on require- ments and family dynamics, multiple trusts may be formed. usually, the trust is discretionary, with family members as trustees. sometimes, an independent/corporate trustee is brought in.
indian tax laws have not been conducive towards succession planning, which often, inad- vertently, suffers the adverse impact of anti-abuse provisions. while Budget 2017 has also brought in several anti-avoidance measures, probably for the first time, some clarity around succession planning, especially via trusts, has emerged.
Taxation of receipt of property
in 2009, section 56(2)(vii) was brought into the income-tax act, 1961 (‘ita’) to tax receipt of certain property (including shares), if received without, or for inadequate consideration, by individuals and hufs. though certain exclusions were provided for receipt of property from speci- fied ‘relatives’, there was no clarity on the impact for property received by a private trust. a pre- vailing view was that these provisions impacted only individuals and hufs but not private trusts.
even if the trust was disregarded, to the extent the beneficiaries fell within the definition of
‘relatives’, the provisions were irrelevant.
Budget 2017 saw these provisions being over- hauled, whereby the tax net was extended to
‘any person’ (including a private trust). this created uncertainty for private trusts in which properties/ shares were settled under the “gift route.” however, sense prevailed and the final provisions exclude property received by a trust from an individual for the benefit of relatives, from the rigours of this amendment. this has provided relief for many indian business fami- lies as, what was previously debatable, has now been codified, giving certainty and granting recognition to private trusts.
while this move is welcome, one needs to bear in mind that the amended provisions clearly specify that receipt by a trust from a per- son other than an individual (such as an huf, firm, llp or company) would fall within the tax net.
Transfer below fair market value
hitherto, as laid down by the supreme court, capital gains on transfer of any asset was com- puted with reference to the actual consider- ation, and except for specific cases (such as sale of land or building), tax authorities could not impute any other amount as the consideration.
however, deeming provisions applicable to sale of unquoted shares have now been inserted (section 50 ca).
consequently, from 1 april 2017, if unquoted shares are transferred for a value lower than their fmv, such fmv shall be deemed as consideration for computing the seller’s capital gains. while the deeming fiction for land and building was clearly to curb cash transactions, the intent to bring shares into this net is unclear, especially as provisions to tax the buyer in such transactions (section 56) already existed. this amendment will clearly lead to double taxation, as both, seller and buyer, will be taxed on the difference between the actual consideration and fmv.
further, unless the method of determining fmv (yet to be notified) is objective (like sec- tion 56, which largely prescribes break-up value) and, instead, is based on say, the discounted cash flow method, it could lead to litigation, if tax authorities do not accept taxpayer determined valuations.
also, unlike section 56, which excludes receipt of shares from relatives, section 50 ca has no relaxation. however, settlements to a trust, where there is no consideration at all, should not be impacted, and therefore, ought to continue to remain an attractive option for succession planning.
Exemption on sale of listed shares
of all the provisions of Budget 2017, the amend- ments to section 10 (38) probably gave rise to most uncertainty and debate. as per the amend- ment, long-term capital gains arising from the transfer of listed equity shares acquired on or after 1 october 2004, would be exempt from tax, only if securities transaction tax (stt) was
time to plan for times to come?
Private trusts have become viable and appealing and will continue to propel action
Kotak is leader, and Jalan, director, m&a Tax, PwC. Views expressed are personal
h i t e n K o t a K
n e e l u j a l a n
Busi n e s s i n di a u t h e m aga z i n e of t h e cor por at e wor l d Guest Column
u 73 u j u n e 5 -18, 2 017
worse off, but equally affected. clearly, Budget 2017 has, on several fronts, brought in much- needed clarity for usage of private trusts for succession planning.
SEBI Regulations
securities & exchange Board of india (sebi) regu- lations, mainly the takeover code, also need to be considered, if listed companies are involved.
traditionally, sebi was resistant to migration of promoter holdings to family trusts, primarily due to lack of transparency and availability of information. it denied permission for transfer of shares from promoters to a private trust, unless the trust was already a shareholder and part of promoter group in last three years.
however, recently, sebi has granted per- mission for some such transfers, provided the trustees and beneficiaries were relatives or part of the declared promoter group. this move by sebi bodes well, paving the path for similar restructuring.
sebi’s renewed stance, combined with Bud- get 2017 and likelihood of inheritance tax being introduced, private trusts have once again become viable and appealing, and will continue to propel action on this front. u paid at the time of their acquisition.
as per a draft notification, practically most transactions have been excluded from the impact of this provision. however, exemption from long-term capital gains tax would not be avail- able for off-market purchase of listed shares.
while several transactions may be hit, a silver lining remains for settlements to trusts, as these cannot be construed as an off-market ‘purchase’.
Taxation of dividends
dividends are subject to a dividend distribu- tion tax of over 20 per cent at the distribut- ing company’s level, with shareholders exempt from further tax. in 2016, a new levy was intro- duced to tax dividends received from domes- tic companies over R1 million by individuals, hufs and firms at 10 per cent (section 115 bbda).
Budget 2017 extended this levy to all resident taxpayers, except domestic companies and charitable institutions.
given that private trusts would be potentially disregarded, and this additional levy imposed at the individual beneficiary level, this provi- sion, though seemingly negative, may not really impact succession planning, as taxpayers are not
Please mail this coupon to:
Mittal Chambers, Office No. 94, 9th Floor, Above Yes Bank, Nariman Point, Mumbai-400 021.
Tel: 22820348 / 22820619. Email: [email protected]
NAME:ADDRESS:
EMAIL: MOBILE:
MYCHEQUE/DD NO.: DATE: DRAWNINFAVOUROF BUSINESS INDIA PUBLICATIONSLTD.
FOR `: DRAWNON ISENCLOSEDHEREWITH.
SIGNATURE: DATE:
INSPIRING BUSINESS ◆ I N S P I R I N G I N D I A
Overseas (One year only) Airmail to Pakistan `4,700 or US$85.
To all other countries `6,600 or US$120. Rates include airmail charges.
Subscription Rates subject to change without prior notice.