Possible risk, ~ income tax on the Share Premium — from shareholders
With an objective to deter generation and use of unaccounted money through subscription of shares of a closely held company at a value which is higher than the Fair Market Value (FMV) of shares of such company, the Finance Act 2012 introduced a new section 56(2)(viib).
Till Year 2023: As per the existing provisions, if a company, in which the public are not substantially interested, receives from any resident person, any consideration for issue of shares exceeding the face value of such shares, the aggregate consideration that exceeds the FMV of the shares, shall be chargeable to tax as ‘Income from other sources’ in the hands of the closely-held company.
Fair market value of the unquoted equity shares is determined in accordance with the method prescribed under Rule 11UA of the Income Tax Rules 1962 (‘Rules’) – either through the book value method or the discounted cash flow (‘DCF’) method, at the option of the company.
and after 2023..
now this is for all… both Resident investor and Non Resident investor
Company safety ?As of now, there is a possibility, that the valuation report is from a CA, who is not a Merchant Banker
whereas
as per law, for NAV method a CA is allowed
but for DCF method, only a Merchant Banker is allowed,
so, we must arrange a Certificate from a Merchant Banker also
Clause (a) of sub rule (2) of Rule 11UA deals with adjusted net asset value (NAV) method. Certification of such valuation is silent in the Rules.
Clause (b) of sub rule (2) of Rule 11UA deals with the discounted cash flow (DCF) approach DCF model indicates the fair market value of a business based on the value of projected cash flows that the business is expected to generate in future.
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Notification issued by CBDT Central Board of Direct Taxes (CBDT) vide its Notification[1], no -23/2018/F.No.370142/5/2018-TPL dated 24th May, 2018 has made alterations in Rule 11UA(2)(b), which allowed merchant bankers and chartered accountants for carrying out valuation of the equity shares using discounted cash flow method.
The notification has withdrawn the power assigned to CAs for determining fair market value of unquoted shares under Discounted cash flow (DCF) method for the purpose of section 56(2)(viib).
The said notification has been made effective from 24th May, 2018.
The notification has also removed the definition of the term ‘accountant’ as defined under Rule 11U, which defines the meaning of expression used in determination of fair market value for Rule 11UA. Therefore, if a closely held company is desirous of issuing further shares and wants to get it valued under DCF, then it will have to get it done by merchant bankers only.
Read more at:
Contact your friendly Merchant Banker
How to Avoid this Possible risk, ?
Answer. = Follow the Law
First, Take advice of a Competent and updated Team
Second, get NAV based certificate from your Friendly Chartered Accountant, he will refer to your last Signed , Audited, Adopted Balance Sheet
and
Thirdly, for DCF method, ask your CA sir to connect to a Friendly Merchant Banker. They will guide you the best.
yes, things are very clear, and there is no confusion.
