Income Tax department for more information in cases of indirect transfer of assets

NEW DELHI: Indian companies that witness any indirect transfer of assets will now have to lay bare minute details of their holdings to Income Tax Department. The government has unveiled a new stringent reporting framework to plug the gap in the system, after tax authorities faced trouble in sourcing information in a number of high-profile tax cases, dealing with indirect transfers.

The rules prescribe that information and documents are required to be maintained and furnished to the tax authorities by an Indian entity whose shares are indirectly transferred. Tax experts say companies will have to prepared for exhaustive disclosures. "This information is required to be kept for eight years," said Rajesh Gandhi, partner at Tax, Deloitte Haskins & Sells LLP. "The extent of the information and documentation required to be kept by the Indian concern seems to be very substantial considering that such information would not be forthcoming quite easily.

Interestingly, any gap in information would make the entire income attributable to assets located in India," said Amit Maheswari, partner, Ashok Maheshwary & Associates LLP. Exhaustive documentation with a sound underlying basis for valuation in case of unlisted shares would be necessary to substantiate the claim of taxpayers of being not covered under Section 9 that deals with indirect transfers of assets.

The Central Board of Direct Taxes on Monday put out draft rules for public comments on calculation of fair market prices of the value derived from assets held in the country. The draft rules provide for determination of fair value of different assets such as listed and unlisted shares of an Indian entity, partnerships and listed and unlisted shares of a foreign entity The draft rules state that the fair value of an unlisted entity will be determined by a merchant banker or chartered accountant in accordance with any internationally accepted pricing methodology. The CBDT has not prescribed any particular valuation methodology and requires the taxpayer to follow internationally accepted principles. This is in line with the FEMA valuation guidelines. Income attributable to assets located in India will be based on the proportion of fair value of assets situated in India as compared to the total fair value of assets of the foreign entity whose shares aretransferred.