SEZ - Tax Implications

SEZ - Tax Implications

v  Special Economic Zone

Special Economic Zone [“SEZ”] is a specified, delineated and duty-free geographical region that has different economic laws from those of the country in which it is situated. In some countries, such a region is even treated as a deemed foreign territory. A SEZ is a trade capacity development tool, with the goal to promote rapid economic growth by using tax and business incentives to attract foreign investment and technology. Today, there are approximately 3,000 SEZs operating in 120 countries, which account for over US$ 600 billion in exports and about 50 million jobs. By offering privileged terms, SEZs attract investment and foreign exchange, spur employment and boost the development of improved technologies and infrastructure. Most developing countries in the world have recognized the importance of facilitating international trade for the sustained growth of the economy and increased contribution to the GDP of the nation.

India is one of the first countries in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports. Asia’s first EPZ was set up in Kandla in 1965. In order to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced on 1^st  April, 2000. The prime objective was to enhance foreign investment and provide an internationally competitive and hassle free environment for exports. The idea was to promote exports from the country and realizing the need that level playing field must be made available to the domestic enterprises and manufacturers to be competitive globally.

To provide a stable economic environment for the promotion of export-import of goods in a quick, efficient and hassle-free manner, Government of India enacted the SEZ Act, 2005 which received the assent of the President of India on June 23, 2005. The SEZ Act and the SEZ Rules, 2006 [“SEZ Rules”] were notified on February 10, 2006. Before enactment of SEZ Act, 2005 there were 13 functional SEZs and about 61 SEZs, which have been approved and are under the process of establishment in India. As of now there are 173 functional SEZs & about 576 SEZs, which have been approved.

v  Facilities and Incentives to SEZ

The incentives and facilities offered to the units in SEZs for attracting investments into the SEZs, including foreign investment include:-

Ø  Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units;

Ø  100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years;

Ø  Exemption from minimum alternate tax under section 115JB of the Income Tax Act;

Ø  External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels;

Ø  Exemption from Central Sales Tax;

Ø  Exemption from Service Tax;

Ø  Single window clearance for Central and State level approvals;

Ø  Exemption from State sales tax and other levies as extended by the respective State Governments;

Ø  Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA.

Ø  Income Tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act.

Ø  Exemption from Central Sales Tax [CST].

Ø  Exemption from Service Tax [Section 7, 26 and Second Schedule of the SEZ Act].

v  Export performance of SEZ units

After liberalization of Indian economy, foreign trade has shown increasing trend. India is considered as an important player globally. Indian government has always strived to push up exports. SEZ has proven a potent tool to promote exports from India. Export performance from SEZ is tabulated below:-

v  Tax implications

By definition, SEZs are so-called “tax havens”. The SEZ Act, 2005 provides exemption from taxes, duties and cess leviable under various statutes listed in the First Schedule to the SEZ Act, 2005 in respect of any goods or services exported out of or imported into, or procured from the unit in a SEZ or Developer. Also, 100% FDI is freely allowed in manufacturing sector in SEZ units under automatic route, except arms and ammunition, explosive, atomic substance, narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks and cigarettes, cigars and manufactured tobacco substitutes.

Tax implications to SEZ under various acts are listed below:-

1. Income tax –

The Developers of SEZ & units established under SEZ were not required to pay Minimum Alternate Tax [MAT] and Dividend Distribution Tax [DDT]. But Finance Act, 2012 amended section 115JB & section 115-O and w.e.f. 1^st April, 2012 MAT & DDT provisions have become applicable to SEZ developer & units of SEZ.  

[A]    Unit established under SEZ

Section 10AA deals with Special provisions in respect of newly established units in SEZ. This section applies to any undertaking, being a unit, which has begun or begins to manufacture or produce articles or things or provide any services during the previous year relevant to the assessment year commencing on or after 1st April, 2006, in any SEZ. It provides for a tax holiday in computing the total income of an assessee, being an entrepreneur, from his unit set up in a SEZ. The quantum of deduction under this section is:

Profits of the business of the undertaking × Export turnover ÷ Total turnover of the business carried on by the undertaking

                           i.       100% of profits and gains derived from the export of such articles or things or from services for a period of 5 consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and

                         ii.      50% of such profits and gains for further 5 assessment years and

                       iii.       Thereafter, for the next 5 consecutive assessment years, so much of the amount not exceeding 50% of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the "Special Economic Zone Re-investment Reserve Account") to be created and utilized for the purposes of the business of the assessee in the manner laid down.

But, no deduction under section 80-IA and 80-IB shall be allowed in relation to the profits and gains of the undertaking. Any unabsorbed depreciation under section 32(2) or business loss under section 72(1) or loss under the head “Capital gains” under section 74 of the undertaking, being the Unit shall be allowed to be carried forward and set off in the subsequent yeas.

Capital Gains on transfer of assets in case of shifting of an industrial undertaking from an urban area to an SEZ shall be exempt, provided that 1 year before, or 3 years after the transfer :

a.       Machinery / plant was purchased for the business of the industrial undertaking in the SEZ;

b.      Building or land was acquired or building was constructed in the SEZ;

c.       The original asset was shifted and the establishment was transferred to the SEZ;

d.      The assessee incurred such other expenses as are notified by the Central Government.

[B]            SEZ Developer

Section 80-IAB was introduced in Income tax act, 1961 whereby a deduction of 100% of profits derived from the business of developing SEZ (notified on or after April 1, 2005) would be available to developer of SEZ for any 10 consecutive years. The Assessee may opt for any 10 consecutive Assessment Years out of 15 Years beginning with the year in which SEZ has been notified by the Central Government. If a Developer has already claimed Deduction under Section 80 IA, he shall get the deduction under this Section only for the unexpired period. If a Developer transfers the operations & maintenance of SEZ to another Developer, the Transferee Developer gets the Deduction for remaining period.

2.Customs and Excise –

SEZ Units may import or procure from the domestic sources, duty free, all their requirements of capital goods, raw materials, consumables, spares, packing materials, office equipment, DG sets etc. for implementation of their projects in the SEZ without requiring any licence or specific approval. SEZ Units are free from the periodic examination by Customs of export and import cargo.

Goods imported/procured locally which are duty-free could or should be utilized within the approval period of 5 years. Domestic sales by SEZ Units will be exempt from Special Additional Duty [SAD]. Domestic sale of finished products, by-products is permitted on payment of applicable Customs duty. Domestic sale of rejects, waste and scrap is permitted on payment of applicable customs duty on the transaction value.

3. Service tax –

Exemption from service tax under Chapter V of the Finance Act, 1994 on taxable services provided to a Developer or Unit to carry on the authorized operations in a SEZ. It is as per Central Government’s notification 12/2013-ST, which stipulates upfront exemption. The service tax pertaining to common services used for authorized operations as well as domestic tariff area operations needs to be distributed as per rule 7 of CENVAT Credit Rules, 2004.

SEZ units with centralized registration can file common refund application. SEZ units and the developers are given the option to use the credit of input services as per the CENVAT credit rules instead of claiming refund. It has to file quarterly statement in Form A-3 containing the details of specified services received without payment of service tax.

4. Sales tax –

Exemption from Central sales tax on inter-state sale or purchase of goods is given to a Developer or Unit of SEZ. The respective State Governments may for the purpose of giving effect to the provisions of the SEZ Act, notify policies for Developers and SEZ Units and take suitable steps for the enactment of any law for granting exemption from state taxes, levies and duties to a Developer or an entrepreneur.

Rule 5(5) of SEZ Rules provides that before recommending any proposal for setting up of an SEZ, the State Government shall endeavor that the proposed SEZ Units and Developer get various incentives which inter alia include exemption from State and local taxes, levies and duties, including stamp duty, and taxes levied by local bodies on goods required for authorized operations by a Unit or Developer, and the goods sold by a Unit in the Domestic Tariff Area except the goods procured from domestic tariff area and sold as it is.

5. Securities Transaction Tax –

The SEZ Act provides for exemption from Securities Transaction Tax to non-residents in certain cases. Exemption under Section 10(38) of the Income tax may be available to a non-resident even in respect of securities transactions, which are exempt from Securities Transaction Tax under Section 26(1)(f) of the SEZ Act.

v  Conclusion

While the SEZ Act and SEZ Rules are steps in the right direction aimed at providing a momentum to growth in exports and employment, it is essential that the tax incentives provided for in the SEZ Act are fine-tuned with the present scheme of taxation. Demand was raised by businessmen to withdraw MAT & DDT which is currently applicable to SEZs. But Union budget, 2014 is silent on these issues. Central government in co-ordination with various departments shall think for streamlining taxation to SEZ so that many new businesses are encouraged to set up ventures.  

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Depreciation Rules Under New Companies Act 2013

The Companies Act, 2013 [henceforth ‘the act’] has become new legislation for corporate India. The act has replaced six decades old legislation and overhauled the corporate functioning. The act marks a major step forward and appreciates the current economic environment in which companies operate. It goes a long way in protecting the interests of shareholders and removes administrative burden in several areas. The act is also more outward looking and in several areas attempts to align with international requirements. The act is landmark legislation and is likely to have far-reaching consequences on all companies operating in India. We are getting close to 1 million registered companies in India. A strong company legislation is therefore imperative.

There are lot many changes in new companies act as compared to old act. The scale of change can be assessed from the rules those are finally issued. These changes would need to be assimilated as most of the sections of the act have come into force as on 1^st April, 2014. One of such key changes is related to regulations governing depreciation provisions.

Depreciation

As per Accounting Standard-6, Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is a non-cash flow expense for an entity. The purpose of depreciation is to charge to expense a portion of an asset that relates to the revenue generated by that asset. Depreciation has a significant effect in determining and presenting the financial position and results of operations of an enterprise.

Section 123 of the act stipulates that depreciation shall be provided in accordance with the provisions of Schedule II. And section 123 along with Schedule II of the act has been notified w.e.f 1^st April, 2014. The act has brought a major alteration in the regulations governing depreciation provisions.

As per Schedule II of the act, Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. It is further stated that the term depreciation includes amortization.  Amortization of intangible assets is to be done as per notified accounting standard.

Applicability of section 123 & Schedule II

Ministry of Corporate Affairs [MCA] vide General Circular 08/2014, has clarified that although Provisions of Schedule II (Useful lives to compute depreciation) and Schedule III (Format of financial statements) have also been brought into force from 1^st April, 2014; the said provisions would become applicable in respect of financial statements of financial years commencing on or after 1* April, 2014.

So for F.Y. 2013-14, depreciation rules stipulated under the Companies Act, 1956 are to be adhered. And from F.Y. 2014-15 onwards, provisions stated in The Companies Act, 2013 will come into force.

Where, during any financial year, any addition has been made to any asset, or where any asset has been sold, discarded, demolished or destroyed, the depreciation on such assets shall be calculated on a pro rata basis from the date of such addition or, as the case may be, up to the date on which such asset has been sold, discarded, demolished or destroyed.

The Companies Act, 1956 requires depreciation to be provided on each depreciable asset so as to write-off 95% of its original cost over a specified period. The remaining 5% is treated as residual value. 100% Depreciation can be charged on assets whose actual cost does not exceed Rs.5,000/-

In Companies Act, 2013 it is clarified that residual value of the asset can not exceed 5% of original cost of the asset. Further, the provision for 100% Depreciation on immaterial items i.e., assets whose actual cost does not exceed Rs.5,000/-. is omitted.

v  Useful life :

‘Useful life’ may be considered as a period over which an asset is available for use or as the number of production or similar units expected to be obtained from the asset by the entity. Part-C to Schedule II has prescribed the useful life for various categories of tangible fixed assets. There are 15 categories of assets mentioned. And the useful life mentioned under it is different than that of The Companies Act, 1956.

Hence, due to such change in the useful lives of the assets many companies will now need to charge much higher depreciation in the books of accounts as compared to earlier rates, specially considering the fact the backlog of depreciation not provided will have to be divided amongst the remaining residual life of the asset.

Eg:-  X Ltd. has purchased Machinery whose 10 years of life has already expired. Now up to 10 years company was providing depreciation at the rate of 4.52% (95/21). That means X Ltd. has already provided 45% (4.52*10 years). So, now as per Schedule II the remaining useful life is only 5 years. Hence, for these 5 years it will have to provide depreciation at a higher rate of 10% (50/5 years).

v  Component approach :

Schedule II of the act also states that the specified useful lives are for the whole of the asset. When the cost of a part (component) of the asset is significant to total cost of the asset and useful life of that part is different from the useful life of the remaining asset, useful life of that significant part should be determined separately.

This indicates that companies are now required to adopt what is known as the ‘component approach’ to compute depreciation on fixed assets. A company will have to estimate the useful life of such a component (since it may not be provided in Schedule II) and depreciate the cost of that specific component over this estimated useful life.

The requirement to adopt a ‘component approach’ similar to that envisaged in Ind-AS, may be an onerous requirement for capital intensive companies since there will be significant effort involved in estimating useful lives for components.

v  Depreciation rates :

In Schedule XIV of The Companies Act, 1956 the rates provided were minimum rates; hence a company was having liberty to charge depreciation at the rates more than minimum one. And on the other hand, in Schedule II of The Companies Act, 2013 nowhere depreciation rates are specified. So, it is to be construed that a company has to charge depreciation at  the same rates over the years. 

Schedule XIV of The Companies Act, 1956 provides separate depreciation rates for double shift and triple shift use of assets.

No separate rates are prescribed for extra shift depreciation. Schedule II provides that Extra Shift Depreciation [ESD] is not applicable to items marked NESD. ESD will apply to plant and machinery items subject to general rate- i.e., useful life of 15years. It has further specified the working of ESD. It provides:-

Ø  50% more depreciation for that period for which asset is used for double shift and

Ø  100% more depreciation for that period for which asset is used for triple shift.

v  Method of Depreciation :

The Schedule XIV to the Companies Act, 1956 prescribes the rates of Straight Line Method [SLM] and Written Down Value[WDV] at which depreciation on various assets need to be provided.

In Schedule II, only useful life is provided, therefore the entity is required to calculate the appropriate rate of depreciation as per the method used by it (SLM or WDV).

v  Classification of Companies :

All companies are divided into the following three classes to decide application of depreciation

(1)   Class of companies as may be prescribed and whose financial statements comply accounting standards prescribed for such class of companies -

These companies will typically use useful lives and residual values prescribed in the schedule II. However, these companies will be permitted to adopt a different useful life or residual value for their assets, provided they disclose jurisdiction of the same.

(2)   Class of companies or class of assets where useful lives or residual value are prescribed by a regulatory authority constituted under an act of the Parliament or by the Central Government -

These companies will use depreciation rates or useful lives and residual values prescribed by the relevant authority for depreciation purposes.

(3)   Other companies -

For these companies, the useful life of an asset will not be longer than the useful life and the residual value will not be higher than that prescribed in the proposed Schedule II.

v  Carrying amount of the asset :

From the date of the Companies Bill coming into effect, the carrying amount (WDV) of the asset as on that date:

§  Will be depreciated over the remaining useful life of the asset according to Schedule II;

§  After retaining the residual value, will be recognized in the opening retained earnings where the remaining useful life is nil.

Potential issue

u The useful life of an asset can be the number of production or similar units expected to be obtained from the asset. This indicates that a company may be able to use Units of Production method for depreciation, which is currently prohibited for assets covered under Schedule XIV of The Companies Act, 1956.

u Companies, covered under class (i) above, will be able to use different useful lives or residual values, if they have jurisdiction for the same. It appears that this provision is aimed at ensuring compliance with Ind-AS 16 for such companies. However, they are likely to be able to start using this option immediately, and need not wait for Ind- ASs to become applicable.

u The application of component accounting is likely to cause significant change in accounting for replacements costs. Currently, companies need to expense such costs in the year of incurrence. Under the component accounting, companies will capitalize these costs, with consequent expensing of net carrying value of the replaced part.

u In case of revaluation, depreciation will be based on the revalued amount. Consequently, the ICAI guidance may not apply and full depreciation on the revalued amount is expected to have significant negative impact on P & L account.

u In case of assets with a nil remaining useful life on the date Schedule II of the act comes into effect, the transitional provisions require that the carrying amount is written off to retained earnings. In other words, the carrying value never gets charged to the P&L account.

u Overall, many companies may need to charge higher depreciation in the P&L because of pruning of useful lives as compare to earlier specified rates. However in some cases, the impact will be lower depreciation, i.e., when the useful lives are much longer compared to the earlier specified rates, such as metal pot line, bauxite  crushing and grinding section used in manufacture of non-ferrous metals.

Conclusion

Although section 123 & Schedule II of the act has been notified, the depreciation provisions are not to be considered for F.Y. 2013-14. But, from next year onwards, the said provisions would have a lot of impact on all the companies in India. So it is a dire need for all of us to understand these provisions, as it would affect accounting of depreciation of companies. Also, while doing audit, it is to be checked that depreciation charged is as per Schedule II of the act.

This Article has been shared by Saurabh Wagle. He can be reached at saurabh.wagle@gmail.com

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Taxation of Gift under Income Tax Act, 1961

·        Introduction

Gift is transfer of certain movable or immovable property from one person to another without consideration. Gift tax was introduced in India in the year 1958 and continued for more than 40 years.  It was by the Finance Act, 1998 that the Gift Tax Act, 1958 was abolished. The Finance Minister then in the course of his budget speech stated that the collection of gift tax was insignificant. It was also conceded that Gift Tax Act had not been successful as an instrument to curb tax evasion and avoidance. As a result Gift Tax was abolished.  At the same time, to ensure that there are no leakages of income tax revenue through the mechanism of gifts, the Income Tax Act was proposed to be amended to tax gifts as income in the hands of the recipient.  Therefore the Finance Minister had by Finance Act, 1998 made a proposal to tax the properties – movable or immovable - without consideration in money or monies worth as income on or after 1^st October, 1998 in the hands of the recipient.  However, as a result of representations received, the proposal to tax gifts as income was dropped. From October, 1998 to August, 2004 any amount received as gift or without consideration no tax was leviable either for giver or receiver. There was a widespread transfer of insincere gifts from the non-relatives.

·        Provision in Income Tax Act

In order to fill up the void, Section 56 (2)(v) of Income Tax Act was passed in 2004 and correspondingly section 2(24)(xiii) was defined. In the course of the presentation of the Budget Speech of 2004, the Finance Minister then stated, "The objective of amendment is to prevent money laundering. Purported gifts from unrelated persons are therefore to be taxed as income".  

As per Section 56 (2)(v) of the Income Tax Act, 1961 any amount exceeding Rs. 25,000 obtained by a person or a Hindu Undivided Family (HUF) without any consideration from any person would be taxed from 1^st September, 2004 under the head ‘Income from other Sources’.

However, this clause shall not apply to any sum of money or any property received—

(a) From any relative; or

(b) On the occasion of the marriage of the individual; or

(c) Under a will or by way of inheritance; or

(d) In contemplation of death of the payer or donor, as the case may be; or

(e) From any local authority as defined in the Explanation to clause (20) of section 10; or

(f) 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

(g) From any trust or institution registered under section 12AA.

          For the purpose of this clause the term ‘Relative’ was defined as :

While introducing the said section the term ‘Gift’ was nowhere used. Transfer of sum of money exceeding Rs. 25,000 [Not the aggregate amount] was taxable in hands of recipient. Gifts in kind and gifts received without adequate consideration [Deemed gift] were non-taxable.

·        Amendment

Ø Finance Act, 2006

In Finance act, 2006 clause (vi) to Section 56(2) was introduced. It was proposed that the sum of money whose aggregate value exceeds Rs. 50,000 was taxable.  It was operative up to 1^st October, 2009.

Ø Finance Act, 2009

The Finance Act, 2009 inserted a new clause (vii) to tax gifts received by on Individual or Hindu Undivided Family (HUF) on or after 1^st October, 2009. With this amendment, gifts in kind received without consideration and gifts received without adequate consideration [Deemed gift] were also made taxable.

‘Gift’ became chargeable to tax if it falls under any of below category :

1.     Any sum of money (gift in cash or by cheque or draft) -

If aggregate amount of sum of money received by an individual/ HUF from one or more persons during a previous year (but on or after 1st October, 2009) exceeds Rs. 50,000, then the whole of such aggregate value will be chargeable to tax.

2.     Immovable property without consideration -

If any immovable property is received without any consideration on or after 1^st October, 2009 and the stamp duty value of which exceeds Rs. 50,000, then the stamp duty value will be chargeable to tax in every such transaction.

3.     Immovable property for a consideration less than the stamp value -

If any immovable property is received on or after 1st October, 2009 for a consideration which is less than the stamp duty value of the property by an amount exceeding Rs. 50,000, then the difference between stamp duty value and consideration is chargeable to tax in every such transaction.

4.     Movable property without consideration -

If any movable property is received without any consideration on or after 1^st October, 2009 and the fair market value of which exceeds Rs. 50,000, then fair market value will be chargeable to tax in every such transaction.

5.     Movable property for a consideration less than fair market value -

If any movable property is received on or after 1st October, 2009 for a consideration which is less than the fair market value of the property by an amount exceeding Rs. 50,000, then the difference between fair market value and consideration is chargeable to tax in every such transaction.

For purpose of this section "Property" means the following capital asset [the term ‘Capital asset was inserted by Finance Act, 2010’] :

(i)                Immovable property being land or building or both;

(ii)             Shares and securities;

(iii)           Jewellery [as defined u\s 2(14)(ii)];

(iv)           Archaeological collections;

(v)             Drawings;

(vi)           Paintings;

(vii)        Sculptures;

(viii)      Any work of art;

(ix)           Bullion [w.e.f. 1^st June, 2010];

Ø Finance Act, 2010

In Finance Act, 2010 Clause (viia) was inserted in section 56(2) with effect from 1^st June, 2010. The provisions were intended to extend the tax net to such transactions in kind. The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income. It is, therefore, proposed to amend the definition of property so as to provide that section 56(2)(vii) will have application to the ‘Property’ which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient.

The clause is applicable if the following conditions are satisfied :

1.     Recipient is a firm or closely held company [Company in which the public are not substantially interested]

2.     The asset that is received is in the form of share in closely held company.

3.     These shares are received from any person.

4.     Such shares are received without consideration or for inadequate consideration.

5.     Such shares are not received by way of transaction referred to in Sec. 47(via)/(vic)/(vicb)/(vid)/(vii) [i.e.       Shares are received in the course of amalgamations, mergers, demergers and re-organisations].

6.     Such shares are received on or after 1^st June, 2010.

Consequences if abovementioned conditions are satisfied :

Situations	Taxability
1. Shares are received without consideration and aggregate value of shares does not exceed Rs. 50,000.	Nothing is taxable
2. Shares are received without consideration and aggregate value of shares exceeds Rs. 50,000.	Aggregate fair value of shares  shall be taxable in the hand of  recipient
3. Shares are received for consideration that is less than the fair market value and the aggregate difference does not exceed Rs. 50,000.	Nothing is taxable
4. Shares are received for consideration which is less than the fair market value and the aggregate difference exceeds Rs. 50,000.	Aggregate fair market value  minus the aggregate consideration  will be taxable in the hand of the  recipient

Ø Rule for computing Fair market value of Movable property

The Central Board of Direct Taxes (CDBT) has prescribed method to calculate fair market value of movable property. Rule 11U and rule 11UA specifies the same. In rule 11U, various terms used in rule 11UA are defined. In rule 11UA methods for computation are specified. Those are as follows :

Properties	Valuation
1.Jewellery, Archaeological collection, Drawings, Painting, Sculpture, Any art of work or Bullion	1.If purchased from  registered dealer, then  Invoice value shall  be the fair market value. 2.     In any other case,  the price of the assets  shall be if it is sold in  the open market.
2.Quoted shares and securities through transaction in recognized stock exchange	Value as recorded in stock  exchange.
3.Quoted shares and securities  [Not being received through transaction in recognized stock exchange]	Lowest price of such shares  traded in any recognized stock exchange in India.
4.Unquoted equity shares	=Net worth*paid up  value one share/total amount  of paid up equity shares  capital as shown in the  balance sheet.
5.Other unquoted shares and securities	Market value shall be the  price it would fetch if sold  in the open market on the   valuation date and the  assessee may get  report from category-1  Merchant Banker or  Chartered Accountants in  respect of such valuation

Ø Finance Act, 2012

In Finance Act, 2012 Clause (viib) was inserted in section 56(2) with effect from 1st April, 2013. If a company, not being a company in which the public are substantially interested receives consideration more than fair market value of shares, then aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable.

The said clause is not applicable if shares are issued to :

a)     Venture capital undertaking from a venture capital company or a venture capital fund [as defined u\s 10(23FB)]

b)    A class or classes of persons as may be notified by Central Government in this behalf

For purpose of this clause, fair market value means higher of the following amount :

a)     As determined in accordance with rule 11 and rule 11UA

b)    As may be substantiated by the company to the satisfaction of the Assessing Officer (AO), based on the value of its assets, including intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature

Ø Finance Act, 2013

Finance Act, 2013 substituted Section 56(2)(vii)(b) by new provisions. It comes in to effect from 1^st April, 2014. If any immovable property is received for a consideration which is less than the stamp duty value of the property by more than Rs. 50,000, the stamp duty value of such property which is in excess of such consideration, shall be chargeable to tax in the hands of the transferee being individual or Hindu Undivided Family (HUF). Where the date of agreement fixing the value of consideration for the transfer of asset and the date of registration of the transfer of the asset are not same, the stamp duty value as on the date of agreement for transfer shall be considered for the purposes of this section. This exception shall be applicable only where the amount of consideration or part thereof for transfer has been received by any mode other than cash on or before the date of agreement.

·        The provisions relating to tax on Gift have travelled as under:

Period	Taxability
Up to 30/09/1998	Liable for tax as gift under the Gift Tax Act in the hands of the donor if amount of gift exceeded Rs.30,000 in a year
01/10/1998 to 31/08/2004	No tax
01/09/2004 to 31/03/2006	Taxable u/s 56(2)(v) as income but only if sum of money of the same exceeds Rs.25,000 from each person
01/04/2006 to 30/09/2009	Taxable u/s 56(2)(vi) as income but only aggregate of sum of money if the same exceeded in aggregate Rs.50,000 in a year in the hands of the recipient from all donors
01/10/2009 onwards	Taxable Receipt of sum of Money, Immovable property as well as certain specified movable property if the amount exceeds Rs.50,000 in aggregate in case of each of such category of assets
01/06/2010 onwards	Section 56(2)(viia) inserted to tax Partnership Firms and unlisted companies [i.e. companies in which public are not substantially interested] when shares of specified companies are received without consideration or at inadequate consideration
01/04/2013 onwards	Section 56(2)(viib) inserted by Finance Act, 2012 to tax unlisted companies [i.e. companies in which public are not substantially interested] if shares are issued to a resident person for consideration more than fair market value, then the difference is chargeable

·        Related issues and anomalies

Ø Any sum of money received from any relative is exempt only for Individuals and for Hindu Undivided Family (HUF) any member thereof. Whether such relation is to be interpreted by the relation of Karta or all members of Hindu Undivided Family including all female members, still remains a question.

Ø Assessable value under stamp duty act in many states needs to be rationalized before the enactment of Section 56(2)(vii)(b). In many cities it is seen that that the market value of the property is less than the value adopted for stamp duty purposes. Enactment of these provisions will lead to unfair taxation on notional income that never existed. Hence it is doubtful as to how the amendment will prevent the circulation of unaccounted money.

Ø If an employer company is dealing in the items covered [Movable assets] for the purpose of the said section and such company provides products to his employee at concessional rate then there would be double taxation.

Ø Sometime the movable assets covered in section 56(2)(vii) might be provided free along with other products sold by a trader, whether the fair market value of the items received without consideration in such a case will be falling in the mischief of the said section, will again be a disputable question.

·        Conclusion

Tax on gifts as per Income Tax Act, 1961 is one of the complicated provisions. Taxation on deemed basis and fair market value concept are not taxpayer’s friendly measures. The better approach for the legislature may be to take the value of the gifts at their cost or actual value in the hands of the donor.

This Article is contributed by Saurabh Wagle. He can be reached at saurabh.wagle@gmail.com

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