Definition of capital asset and transfer widened
Amendment proposed (with retrospective effect from 1 April 1962) and impact analysis
Finance Bill, 2012 proposes to tax indirect transfer of capital assets in India by inserting clarificatory explanations to Section 2(14) & 2(47). The following explanations have been added to the respective sections:
■ 2(14): For the removal of doubts, it is hereby clarified that "property" includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.
■ 2(47): For the removal of doubts, it is hereby clarified that "transfer" includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.
Analysis of proposed Amendments
Definition of capital assets- Explanation to Section 2(14) of the ITA
■ The Bill proposes to insert an explanation in Section 2(14) of the ITA in order to clarify that 'property' includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.
■ The insertion of the explanation widens the definition of capital asset and clarifies that the term 'property' includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any rights whatsoever.
■ This amendment is also directed to overrule observation in the case of Vodafone (supra), wherein it has been held that the capital asset transferred were the shares of a foreign company and transfer of controlling interest is not a capital asset in itself but is incidental to transfer of shares.
■ After the amendment, transfer of shares (at any level) which result in transfer of controlling interest of an Indian Company could give rise to a taxable event in India.
Definition of 'transfer'- Explanation to Section 2(47) of the ITA
■ It has been clarified by way of an amendment that 'transfer' includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.
■ The amendment clarifies that 'transfer' in relation to capital assets includes disposing or parting of an asset or interest therein provided such transfer of rights is effected or dependent upon the transfer of a shares of a company (whether registered or incorporated outside India). Thus, 'transfer' would include indirect transfer of shares if rights in such shares are effected and dependent upon transfer of shares even of a foreign company.
As per the existing provisions in the ITA, if the assessing officer is of the opinion that the value so claimed by the assessee (arrived in accordance with the registered valuer) is less than its Fair Market Value (FMV); he may refer the same to a valuation officer to ascertain its actual FMV.
However, the provisions led to a situation wherein if a property was acquired on or before 1st April, 1981 the assessee had an option of taking a higher FMV as on 1st April, 1981 and hence pay a lower capital gains tax. The transaction could not be questioned since the power of the assessing officer is limited to questioning a transaction where the value claimed by the assessee is less that the FMV.
Amendment proposed (with retrospective effect from 1 April 1962) and impact analysis
Finance Bill, 2012 proposes to tax indirect transfer of capital assets in India by inserting clarificatory explanations to Section 2(14) & 2(47). The following explanations have been added to the respective sections:
■ 2(14): For the removal of doubts, it is hereby clarified that "property" includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.
■ 2(47): For the removal of doubts, it is hereby clarified that "transfer" includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.
Analysis of proposed Amendments
Definition of capital assets- Explanation to Section 2(14) of the ITA
■ The Bill proposes to insert an explanation in Section 2(14) of the ITA in order to clarify that 'property' includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.
■ The insertion of the explanation widens the definition of capital asset and clarifies that the term 'property' includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any rights whatsoever.
■ This amendment is also directed to overrule observation in the case of Vodafone (supra), wherein it has been held that the capital asset transferred were the shares of a foreign company and transfer of controlling interest is not a capital asset in itself but is incidental to transfer of shares.
■ After the amendment, transfer of shares (at any level) which result in transfer of controlling interest of an Indian Company could give rise to a taxable event in India.
Definition of 'transfer'- Explanation to Section 2(47) of the ITA
■ It has been clarified by way of an amendment that 'transfer' includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.
■ The amendment clarifies that 'transfer' in relation to capital assets includes disposing or parting of an asset or interest therein provided such transfer of rights is effected or dependent upon the transfer of a shares of a company (whether registered or incorporated outside India). Thus, 'transfer' would include indirect transfer of shares if rights in such shares are effected and dependent upon transfer of shares even of a foreign company.
As per the existing provisions in the ITA, if the assessing officer is of the opinion that the value so claimed by the assessee (arrived in accordance with the registered valuer) is less than its Fair Market Value (FMV); he may refer the same to a valuation officer to ascertain its actual FMV.
However, the provisions led to a situation wherein if a property was acquired on or before 1st April, 1981 the assessee had an option of taking a higher FMV as on 1st April, 1981 and hence pay a lower capital gains tax. The transaction could not be questioned since the power of the assessing officer is limited to questioning a transaction where the value claimed by the assessee is less that the FMV.
No comments:
Post a Comment