Budget impact: Gifts of shares, assets in corporate restructuring now taxable

Mumbai/Chennai: Corporate restructuring is a common practice. Assets or shares are transferred by one company to another group company for various business reasons. Such a transfer can even be done by way of a ‘gift’, which mitigates tax liability. It is this mode that the Budget proposals now seek to plug.

Currently, taxation of gifts as an anti-abuse provision is restricted to receipt of money above Rs 50,000, immovable property or specified movable property, without consideration or for inadequate consideration by individuals and HUFs. The cash or value of the gift is taxed in the hands of the recipient as ‘income from other sources’. Firms, limited liability partnerships or private companies are covered only if the gift is of unlisted shares. Now the scope has been enlarged — a new section covers all gifts to private and listed companies.

“Tax tribunals and courts have in the past examined group restructuring under a gift mechanism and in several instances have held that no capital gains tax arose. Thus, Company A could transfer its shareholding in its wholly owned subsidiary (Company B) by way of a gift to another group company (Company C). There would be no capital gains on such transfer. Post the restructuring, Company B would then be the subsidiary of Company C. Such restructuring took place for many business reasons — such as hiving off of an activity carried out by the subsidiary or for enabling a group entity to raise funds, as the transfer would result in a strong valuation,” explains Sudhir Kapadia, tax head at EY India.


“For capital gains to apply, there must be a transfer, whereas in this arrangement it was a gift. Second, the computation mechanism for arriving at capital gains also failed as the shareholding in the subsidiary was transferred without consideration,” adds Kapadia.

Vipul Jhaveri, tax leader at Deloitte, says, “When it comes to public companies, typically transfer will be done at fair value because there are public shareholders. For closely held companies, any kind of business reorganisation which is not done at fair value could now be under the scanner.”

Ajay Rotti partner, Dhruva Advisors, says, “The earlier provisions had left out trusts that were being used for corporate restructuring. Now, corporate restructuring that involves gifting assets or shares to a family trust will be impacted.”