Indian Fair Value Tax Rules Are Issued

by Lorys Charalambous, Tax-News.com, Cyprus

20 April 2010

The Indian Central Board of Direct Taxes (CBDT) has now produced formulae to determine the fair market value of shares and other gifted property for calculating tax, which will apply after the finance bill is passed in Parliament. These are being scrutinized with some apprehension by private equity market specialists.

The Indian government amended Section 56 of the Income Tax Act in 2009 to introduce tax on gifts or transfers of wealth where there was a difference between the fair market value and money paid by the recipient. Gifts of jewellery, art etc bought after October 1, 2009 will have to be valued and taxed in line with new rules.

However gifts from a relative for a marriage, under will or by way of inheritance, from any local authority, or from any fund or trust are exempted from tax. Spouses, siblings, and any lineal ascendant or descendant are defined as relatives under the Income Tax Act.

According to the CBDT notification, jewellery, archaeological collections, drawings, paintings, sculptures or works of art should be valued at the price which they would fetch if sold on the open market on the valuation date. For jewellery or artistic works bought on the valuation date from a registered dealer, its invoice amount should count as the fair market value.

If jewellery or art is bought or received in any other way and its value exceeds INR50,000 (USD1,120), a registered valuer would need to report its estimate of the price, if sold on the open market on the valuation date.

The CBDT stated that fair market value for unquoted shares (warrants, preference shares) and securities listed on any recognized stock exchange would be the price it would fetch if sold in the open market on the valuation date and a report from a broker or an accountant would be required to verify this.

Fair market value of unlisted shares would be calculated on the basis of net book values and for PIPE (private investment in public enterprises). The fair value of shares would be the lowest price quoted on any recognized stock exchange on the valuation date.

When shares are bought at lower than the fair value, tax would accrue on such discounts. Foreign venture capital investors would be liable for tax of 42% on the difference and domestic investors would be taxed at 33%. Corporate capital market deals would also be affected if shares transfers were free or set at rates below the fair market value.

Praveen Chakravarty, managing director, BNP Paribas Securities India Pvt. Ltd, told Livemint that price discovery was a function of the capital markets and not being able to do deals below fair value without a tax liability would disturb this process.

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