[Opinion] Taxation of Share Premium – Widening the Scope of Section 56(2)(viib)

Chandraprakash R Surana, V Seshadri & Deepak Bharadwaj – [2023] 147 taxmann.com 293 (Article)

With an objective to deter generation and use of unaccounted money through subscription of shares of a closely held company at a value which is higher than the Fair Market Value (FMV) of shares of such company, the Finance Act 2012introduced a new section 56(2)(viib).

As per the existing provisions, if a company, in which the public are not substantially interested, receives from any resident person, any consideration for issue of shares exceeding the face value of such shares, the aggregate consideration that exceeds the FMV of the shares, shall be chargeable to tax as ‘Income from other sources’ in the hands of the closely-held company.

Fair market value of the unquoted equity shares is determined in accordance with the method prescribed under Rule 11UA of the Income Tax Rules 1962 (‘Rules’) -either through the book value method or the discounted cash flow (‘DCF’) method,at the option of the company.

Amendment Proposed in Finance Bill 2023

The Finance Bill 2023 has proposed an amendment to section 56(2)(viib) to remove the words “being a resident” with effect from 01 April 2024. Hence, this section, once enacted, would apply to inbound investments into India from any non-resident who invests in equity shares of a closely-held Indian company.

As per the Memorandum to the Finance Bill 2023, the stated objective of the proposed amendment to section 56(2)(viib) is to widen the tax base by rationalisingthe tax provisions in order to eliminate the possibility of tax avoidance by extending the applicability to any person irrespective of the residential status.

Click Here To Read The Full Article