The Finance Bill to Include Share Premium in the Category of Income
The Finance Bill 2012 seeks to make some important amendments in the Income Tax Act. An Analysis of the Bill shows that it tends to include Share Premium under the category of income when the price exceeds the face value.
Current position of share premium:
When someone invests in shares of a private limited company having a rate higher than the fair value which is called premium, the premium does not fall under the category of income. But it is a capital receipt. The amount does not even show any reflection in the profit and loss account. It is described as share premium in the balance sheet.
Position according to proposed amendment:
Now when a company will invest in shares at a price higher than the face value, the extra price at which it is issued will be considered as income of the company.
When is the provision not applicable?
When the shares are issued at face value, then this provision is not applicable. Thus when the fair value is Rs. 3 per share, but shares are issued at the rate of Rs. 20 per share that is its face value, the difference between the two that is Rs. 17 will not be taxed.
This provision is not applicable in cases where the consideration taken for issuing them is received by a venture capital undertaking or a venture capital company or fund. It is also not in case the tax payer is a non-resident.
Illustration of applicability of the provision:
If shares are issued at the rate of Rs. 10 per share and the fair value is Rs. 4 per share, then Rs. 6 will be treated as income.
Nature of the amendment:
This amendment is related to section 68 of the amendment proposed in the Finance Bill, 2012.
As per section 68 the company investing in shares needs to explain the source of funds held by the shareholders. If the company fails to establish the sources, the company will be taxed upon the amount received towards shares.
When the price at which the shares are booked is greater than the fair market value, the company is liable to pay tax for the difference that is between the price of issuing of the, and its fair value.
When the market value is treated as higher?
The fair market value of the shares is treated as the higher in the following values –
(i) As is determined according to the method which is prescribed by the Government); or
(ii) As may be substantiated by the company if the Assessing Officer is satisfied, on the basis of the market value of its current assets.