New guidelines notified for figuring out deemed consideration for hunch sale; key issues to know

CBDT has now prescribed the foundations containing the mechanism regarding computation of the FMV in hunch sale transactions.

By Anish Shah

Union Finances 2021 launched important amendments within the provisions regarding the taxation of hunch sale transactions. One of many key amendments is in relation to computation of consideration worth for hunch sale taxation. Earlier, the consideration truly paid or acquired on the hunch sale was thought-about for figuring out the capital features tax on the sale.

The Finance Act, 2021 has nonetheless supplied that to compute the tax arising on account of such hunch sale, the Truthful Market Worth (FMV) of the capital property (being an endeavor or division transferred by means of hunch sale) shall be deemed to be full worth of the consideration. Nonetheless, the methodology to compute FMV was not prescribed by the Finance Act, 2021.

The Central Board of Direct Taxes has now prescribed the foundations containing the mechanism regarding computation of the FMV in hunch sale transactions. The rule supplies two strategies to calculate the FMV of the capital property transferred by means of hunch sale.

As per technique 1, FMV is basically the ebook worth of the endeavor which is adjusted for truthful worth of sure property similar to jewelry, creative work, shares, securities, and immovable properties (Adjusted ebook web price technique). The truthful worth of such property specified above must be computed as per the prescribed tax valuation norms. Whereas as per technique 2, FMV is the whole of each financial and non-monetary consideration acquired or accruing on hunch sale. The place the consideration contains non-monetary consideration as effectively, the truthful worth of the property which signify the non-monetary consideration is to be decided as per the prescribed tax valuation norms.

The upper of the FMV derived utilizing the above 2 strategies shall be deemed to be the total worth of consideration for calculating the capital features arising on such hunch sale.

For the reason that larger of the 2 FMVs have to be adopted for calculation of capital features and tax thereon, in a case the place, the precise sale consideration is lower than the adjusted ebook web price of the endeavor, the tax will have to be computed utilizing the adjusted ebook web price because the consideration quantity.

One other essential side to bear in mind is that the modification pertaining to dedication of consideration quantity on hunch sale is relevant retrospectively from FY 20-21. Subsequently, corporations which have undertaken hunch sale transactions in FY 20-21 could have to re-visit and if required re-compute their capital features to find out any further tax legal responsibility that might come up on the hunch sale transactions undertaken by them in FY 20-21.

These new guidelines for figuring out the deemed consideration quantity could have an effect on hunch sale transactions between group entities the place the consideration quantity is both nominal or restricted to the ebook worth of the endeavor being transferred.

(Anish Shah is Affiliate Accomplice, M&A Tax and Regulatory Companies at BDO India. Views expressed are creator’s personal.)

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