Understanding Section 56(2)(viia) of Income Tax Act
Section 56(2)(viia) of the Income Tax Act is a provision that deals with the taxation of income arising from the transfer of certain unlisted shares. This provision was introduced in 2017 and has been a subject of much discussion and debate ever since. In this blog post, we will break down the various aspects of this section and help you understand what it means.
What is Section 56(2)(viia)?
Section 56(2)(viia) is a provision in the Income Tax Act that deals with the taxation of income arising from the transfer of unlisted shares. According to this provision, if an individual or a Hindu Undivided Family (HUF) receives any consideration for the transfer of unlisted shares, which exceeds the fair market value (FMV) of the shares, then the excess amount will be taxed as income from other sources.
What are Unlisted Shares?
Unlisted shares are shares of a company that are not listed on any recognized stock exchange in India. These shares are not traded on the stock market and are usually held by a small group of investors. The value of unlisted shares is determined by the company’s net worth, earnings, and other factors.
How is the Fair Market Value (FMV) of Unlisted Shares Determined?
The FMV of unlisted shares is determined by a registered valuer. The valuer takes into account various factors, such as the company’s financial statements, assets, liabilities, and other relevant information, to arrive at the FMV of the shares.
What is the Rate of Taxation under Section 56(2)(viia)?
The excess consideration received for the transfer of unlisted shares, over and above the FMV, is taxed at the rate of 20%. This tax is levied as income from other sources and is added to the individual’s or the HUF’s total income for the year.
Are there any Exemptions Available under Section 56(2)(viia)?
There are certain exemptions available under Section 56(2)(viia). For example, if an individual receives unlisted shares as a gift from a relative, then the FMV of the shares will be taxed as income from other sources. However, if the shares are received from a non-relative, then the entire amount received will be taxed as income from other sources.
Why was Section 56(2)(viia) Introduced?
Section 56(2)(viia) was introduced to prevent individuals and HUFs from evading taxes by receiving excessive consideration for the transfer of unlisted shares. Prior to the introduction of this provision, it was common for individuals and HUFs to receive cash or other forms of consideration for the transfer of unlisted shares at a value much higher than the FMV of the shares. This allowed them to evade taxes and hide their true income from the government.
The government introduced Section 56(2)(viia) to curb this practice and ensure that individuals and HUFs pay taxes on their true income. By taxing the excess consideration received for the transfer of unlisted shares, the government is able to capture the true value of the transaction and prevent tax evasion.
Challenges Faced by Taxpayers
One of the biggest challenges faced by taxpayers under Section 56(2)(viia) is the determination of FMV of unlisted shares. Since there is no active market for unlisted shares, determining their true value can be a complex and time-consuming process. Taxpayers may have to engage the services of a registered valuer to arrive at the FMV of the shares, which can be expensive.
Another challenge is the high tax rate of 20% on the excess consideration received for the transfer of unlisted shares. This can significantly increase the tax liability of taxpayers and reduce their net income. Taxpayers may need to plan their transactions carefully to minimize their tax liability under Section 56(2)(viia).
Conclusion
Section 56(2)(viia) of the Income Tax Act is a provision that is aimed at preventing tax evasion by individuals and HUFs through the transfer of unlisted shares. While the provision has been subject to some criticism, it is an important tool for the government to ensure tax compliance and fairness. Taxpayers should be aware of the provisions of Section 56(2)(viia) and comply with its requirements to avoid any unnecessary penalties or legal issues. Seeking professional advice and planning transactions carefully can help taxpayers minimize their tax liability under this provision.
Read more useful content:
- section 234e of income tax act
- section 286 of income tax act
- section 90a of income tax act
- section 40a(7) of income tax act
- section 226(3) of income tax act
- section 24 of income tax act
Frequently Asked Questions (FAQs)
What is Section 56(2)(viia) of the Income Tax Act?
Section 56(2)(viia) is a provision in the Income Tax Act that deals with the taxation of income arising from the transfer of unlisted shares.
How are unlisted shares defined?
Unlisted shares are shares of a company that are not listed on any recognized stock exchange in India.
How is the fair market value (FMV) of unlisted shares determined?
The FMV of unlisted shares is determined by a registered valuer who takes into account various factors, such as the company’s financial statements, assets, liabilities, and other relevant information.
What is the tax rate under Section 56(2)(viia)?
The excess consideration received for the transfer of unlisted shares, over and above the FMV, is taxed at the rate of 20%.
Are there any exemptions available under Section 56(2)(viia)?
There are certain exemptions available under Section 56(2)(viia), such as if an individual receives unlisted shares as a gift from a relative.
Why was Section 56(2)(viia) introduced?
Section 56(2)(viia) was introduced to prevent individuals and HUFs from evading taxes by receiving excessive consideration for the transfer of unlisted shares.
What are the challenges faced by taxpayers under Section 56(2)(viia)?
One of the biggest challenges faced by taxpayers is the determination of FMV of unlisted shares. Another challenge is the high tax rate of 20% on the excess consideration received.
How can taxpayers minimize their tax liability under Section 56(2)(viia)?
Taxpayers can seek professional advice and plan their transactions carefully to minimize their tax liability under Section 56(2)(viia).
Is compliance with Section 56(2)(viia) important?
Yes, compliance with Section 56(2)(viia) is important to avoid any unnecessary penalties or legal issues.
What should taxpayers do to ensure compliance with Section 56(2)(viia)?
Taxpayers should be aware of the provisions of Section 56(2)(viia) and comply with its requirements, such as determining the FMV of unlisted shares and paying tax on the excess consideration received. Seeking professional advice can also be helpful.
