Transfer of shares of listed entities is quite a simple and fair process as the price of shares are available on the stock exchange and shareholders have no option to transfer shares at value other than price available on stock exchange. However, what about the unquoted or unlisted equity shares. Whether shareholders can transfer such shares at any price or is there any mechanism specified for the same?
Transfer of unlisted equity shares is a transaction between two shareholders and the same is carried out at the price agreed upon between shareholders. Now the obvious question arises is whether shareholders can transfer the unlisted equity shares at price less than Fair market value of such shares? So, yes shares can be transferred at value less than FMV of shares. Free and unregulated trade of unquoted shares led to utilization of the provisions to abusive practices where companies were avoiding capital gains tax on transfer of shares, by valuing the shares very low and escaping tax.
To prevent such practices, Finance Act, 2017 introduced anti-abuse Section 50CA. This section shall consider the fair market value of the unquoted shares for computation of capital gain instead of transaction value.
Read Also: Form 26AS | Changes made with effect from 01.06.2020
In case of transfer of shares at value less than Fair Market Value, income tax provisions are applicable on both transferor and transferee.
This article discusses income tax implications on transfer of unquoted equity shares at price less than Fair Market Value.
1. Tax Implication in hands of transferor of shares
1.1 Sales consideration for Computation of Capital gains
- As per Section 50CA of Income Tax Act, Where the consideration for transfer of share of a company, other than a quoted share, is less than the fair market value of such share then such fair market value shall be considered as consideration for computation of capital gains under Section 48.
- Fair market value of the unquoted shares shall be computed as per Rule 11UAA of Income Tax Rules.
- “Quoted Shares” means the share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such shares is based on current transactions made in the ordinary course of business.
1.2 Manner of Computation of Fair Market Value of Unquoted Shares
- As per Rule 11UAA, for section 50CA, the fair market value of unquoted shares shall be determined as per the formula given under sub-clause (b) or (c) of Rule 11UA(1)(c) of Income Tax Rules.
- As per Rule 11UA(1)(c) of Income Tax rules, Fair market value of the unquoted shares can be computed in following manner:
- FMV of Unquoted Equity Shares (Sub-clause (b)):
Fair Market Value of unquoted equity shares= (A + B + C + D – L) × (PV)/(PE), where,
- A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance sheet as reduced by;-
- any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and
- any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;
- B= Fair market value of the jewellery and artistic work as per valuation report obtained from a registered valuer
- C= fair market value of shares and securities as determined in the manner provided in this rule;
- D= Value of Immovable Property as opted for the purpose of payment of stamp duty;
- L= book value of liabilities shown in the balance sheet. However, it shall not include following amounts:
- the paid-up capital in respect of equity shares;
- the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer;
- reserves and surplus (including negative balances), other than those set apart towards depreciation
- Provision of Income Tax reduced by Income tax paid (advance tax, TDS or TCS)
- Provisions for made for meeting liabilities, other than ascertained liabilities;
- Contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;
- PV= Paid up value of equity shares to be transferred
- PE= total amount of paid-up equity share capital as shown in the balance sheet
- FMV of unquoted shares and securities, other than equity shares
- the FMV of unquoted shares and securities, other than equity shares, shall be estimated sales price on the valuation date and the assessee may obtain a report from a merchant banker or an accountant for such valuation.
1.3 Which date should be considered for computation of Fair Market Value
- As per Rule 11UA, fair market value of unquoted equity shares shall be the value determined as on valuation date.
- As per Rule 11UAA, for the purpose of Rule 11UA, valuation date shall be the date on which asset is transferred.
2. Tax Implication in hands of transferee of shares
With anti-abusive provision of Section 50CA, corresponding amendment was also made in Section 56(2)(x) of Income Tax Act. Earlier, Section 56(2)(x) provides for taxability of any money or immovable property received without any consideration or for value less than fair market value.
自2017年4月1日起，第56(2)(x)条新增了(c)子条款，规定对于无对价或以低于公允市场价值的对价收到的任何财产（包括股份），均需缴纳所得税。
2.1 非上市股份受让方所得的计算
- 根据第56(2)(x)(c)条，当收到不动产以外的任何财产且未支付对价或对价不足时，以下金额应被视为“其他来源收入”：
- 若无对价收到财产，则为财产的公允市场价值；
- 若以不足的对价收到财产，则为财产的公允市场价值减去已支付的对价。
- 若上述收入不超过50,000印度卢比，则第56(2)(x)(c)条的规定不适用。
2.2 第56(2)(x)条规定的不适用情形
- As per Section 56(2)(x), clause (x) shall not apply to any sum of money or any property received:
- from any relative; or
- on the occasion of the marriage of the individual; or
- under a will or by way of inheritance; or
- in contemplation of death of the payer or donor; or
- from any local authority as defined in the Explanation to Section 10(20);
- from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or
- from or by any trust or institution registered under section 12A or section 12AA or section 12AB; or
- by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to Section 10;
- by way of transaction not regarded as transfer under section 47; or
- from an individual by a trust created or established solely for the benefit of relative of the individual;
- by an individual, from any person, in respect of any expenditure actually incurred by him on his medical treatment or treatment of any member of his family, for any illness related to COVID-19 subject to such conditions, as the Central Government may, by notification in the Official Gazette, specify in this behalf;
- by a member of the family of a deceased person,—
- from the employer of the deceased person; or
- from any other person or persons to the extent that such sum or aggregate of such sums does not exceed INR 10,00,000
若该人员的死亡原因是新冠肺炎（COVID-19）相关疾病，且款项支付符合以下条件——
- 在死者去世之日起12个月内收到；且
- 符合中央政府在官方公报中为此类事项所规定的其他条件。
3. 第50CA条与第56(2)(x)条下的双重征税
在以低于公允市场价值（FMV）的价格转让非上市股权时，转让方需以股份的公允市场价值作为销售对价缴纳资本利得税。因此，转让方需就公允市场价值与实际销售对价之间的差额缴纳所得税。
另一方面，受让方需就公允市场价值与实际销售对价之间的差额，按“其他来源收入”缴纳所得税。因此，存在双重征税的情况。
以下示例可说明这一点：
- 股份转让方：A
- 股份受让方：B
- 销售对价：500,000印度卢比
- 公允市场价值（FMV）：700,000印度卢比
- 取得成本：250,000印度卢比
- A的纳税情况
销售对价（根据第50CA条）：700,000印度卢比
取得成本：250,000印度卢比
资本利得：450,000印度卢比
- B的纳税情况
根据第56(2)(x)条的其他来源收入：200,000印度卢比（公允市场价值 - 销售对价）
