26 October 2016 EY Tax Alert Indian Administration issues draft Exit Tax Rules for charitable organisations; invites comments from stakeholders Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. The Central Board of direct taxes (CBDT), the apex administrative body for direct taxes in India, has recently issued [1] draft rules in relation with the Exit Tax imposable on charitable trust or institution on trigger of specified circumstances under Chapter XII- EB of Income tax Act, 1961 (ITA). Vide Finance Act ( FA ) 2016 new provisions were inserted which provide for taxation of charitable trust/ institutions on its winding up/merger/dissolution/ conversion into non- charitable organisation. Under those provisions, tax is levied on charitable institutions or trust at maximum marginal rate (MMR) on accreted income of the trust or institutions on in case of specified circumstances laid down. The term accreted income is defined to mean the fair market value (FMV) of the assets held by the trust as reduced by liabilities computed in accordance with method of valuation prescribed. In deference to powers conferred, the CBDT has now has issued draft rules (Rule 17CB) for public consultation (the draft rules). The draft rules provide for valuation mechanism. Comments and suggestions of stakeholders and general public are invited by 31 October 2016. This Tax Alert highlights key aspects of the draft rules. [1] F. No. 370142/21/2016-TPL dated 24 October 2016
Background Exit tax provisions under ITA (ii) Under ITA, charitable trusts/institutions registered under ITA enjoy tax exemption subject to fulfilment of specified conditions. Prior to FA 2016, there was no clarity on taxability status of assets of a charitable institution on its winding up/merger/ dissolution/conversion into noncharitable organisation. There was no provision to ensure that the corpus and assets base is utilized for charitable purpose and same is not used for any other purpose. There was a need felt to introduce specific provisions under the ITA to provide for tax impact where charitable trust or institution is merged/dissolved/converted into noncharitable organisation. (iii) FA 2016 incorporated a new Chapter XII EB under the ITA to impose a tax on charitable trusts and institutions under certain circumstances. Under the provisions of this chapter, tax is levied at MMR on accreted income of the trust or institutions on in case of circumstances laid down in that chapter. (iv) The term means: (vi) Under the provisions of the Chapter, the CBDT is empowered to prescribe rules for valuation methodology. The CBDT has come up with the draft rules specifying the valuation mechanism and such rules are kept in public domain for comments and suggestions of stakeholders by 31 October 2016. The Draft Rules: 1. Draft rules on determination of FMV of assets (Draft Rule 17CB) The aggregate FMV of the total assets of the trust or institution, shall be the aggregate of the FMV of all the assets in the Balance Sheet as reduced by any amount of tax paid as deduction at source (TDS) or any amount of tax paid as collection at source (TCS) or as advance tax payment (The above is to be reduced by the amount of tax claimed as refund under the ITA) any amount shown in the Balance Sheet as an asset including the unamortized amount of deferred expenditure which does not represent the value of any asset The date of conversion in case of conversion of charitable trust or institution to any form which is not registered as a charity The date of merger in case of merger of charitable trust or institution other than an entity which is a trust or institution having similar objects and registered as a charity Date of dissolution in case of dissolution of trust which has failed to transfer assets within a period of twelve months from the end of the month in which the dissolution takes place to any other trust or institution registered for charitable or educational or medical purpose (v) The term accreted income is defined to mean the FMV of the assets held by the trust as reduced by liabilities computed in accordance with method of valuation prescribed.
Sr. No. (ii) Type of asset FMV of assets held by the Charitable Trust/institution: Method of determining FMV Valuation by 2. Draft Rules to determine value of liabilities: 1. Quoted shares and securities 2. Unquoted Equity Shares [2] Average of lowest and highest price of shares or securities quoted on recognised stock exchange (RSE) on Where shares or securities are not traded on the of RSE, average of lowest and highest price of shares or securities quoted on recognised stock exchange on a date immediately preceding the (A +B L) x PV PE N.A. N.A. The total liability of the trust or institution shall be the book values of liabilities in the Balance Sheet as on the as reduced by: Capital fund or accumulated fund or corpus Reserve or surplus or excess of income over expenditure Amount representing contingent liability Amount representing provisions made for liabilities other than ascertained liabilities Amount representing provision of taxation other than tax paid as deduction or collection at source or advance tax reduced by the amount claimed as refund to the extent of excess over tax payable 3. Shares and securities other than Equity Shares Amount which would be fetched if sold in the open market on the Merchant banker or an accountant [3] 4. Immovable property 5. Business Undertaking Higher of the following: Amount which would be fetched in the open market on Stamp duty value on Net assets i.e. A + B L [5] Registered valuer [4] N.A. 6. Any other asset Amount which would be fetched if the asset is sold in the open market Registered valuer [6] [2] Refer Note below [3] Refer support definitions and (iii) below [4] Refer support definitions (v) below [5] Refer Note below [6] Refer support definitions (v) and (ix) below
3. Note: 4. Support definitions: A B L PE PV Valuation of unquoted Equity Shares: Fair market value = (A +B L) x PV PE Book value of the assets in the Balance Sheet as on (other than bullion, jewellery, precious stone, artistic work, shares, securities, immovable property) as reduced by i. any amount of TDS or ii. any amount of TCS or iii. as advance tax payment (The above (i.e. i to iii) to be reduced by the amount of tax claimed as refund under the ITA) iv. any amount shown in the Balance Sheet as an asset including the unamortized amount of deferred expenditure which does not represent the value of any asset FMV of bullion, jewellery, precious stone, artistic work, shares, securities, immovable property as computed under this rule Book value of liabilities shown in the Balance Sheet as on but not including the following amounts: i. the paid-up capital in respect of equity shares; ii. the amount set apart for payment of dividends on preference shares and equity shares; iii. reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; iv. any amount representing provision for taxation, other than amount of TDS or TCS or as advance tax payment. The quantum of TDS or TCS or advance tax needs to be reduced by the amount of tax claimed as refund under the ITA; v. any amount representing provisions made for meeting liabilities, other than ascertained liabilities; vi. any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; Total amount of paid up equity share capital as shown in the Balance Sheet The paid up value of such equity shares (ii) Accountant means a fellow of the Institute of Chartered Accountants of India and who is not appointed as auditor of the trust or institution Balance Sheet means balance sheet of the trust or institution (including the notes annexed) as drawn on the specified date and audited by the accountant (iii) Merchant banker means category I merchant banker registered with Securities and Exchange Board of India. (iv) Quoted shares and securities in relation to share or security means share or security quoted on any recognized stock exchange [7] with regularity (v) Registered valuer means has the same meaning as assigned under Wealth Tax Act, 1957 (vi) Specified date means the date as provided under Chapter XII-EB of the ITA. (vii) Stamp duty value means value adopted or assessed or assessable by Central or State Government for payment of stamp duty of an immovable property (viii) Unquoted share or security means share or security which is not a quoted share or security. (ix) Where no valuer is registered to value the assets provided at Sr. no. 6 in table above, the valuation report is to be obtained from a valuer who is a member of any one of the professional valuer bodies viz. Institution of Valuers, Institution of Surveyors (Valuation Branch), Institution of Govt. Approved Valuers, Practicing Valuers Association of India, The Indian Institution of Valuers, Centre for Valuation Studies, Research and Training, Royal institute of Chartered Surveyors, India Chapter, American Society of Appraisers, USA, Appraisal institute USA or a valuer who is appointed by any public sector banks or public sector undertakings for valuation purposes. [7] Recognized stock exchange has the same meaning as assigned in Securities Contract (Regulation) Act, 1956
Comments The Exit Tax rules were keenly awaited to provide the much required clarity and certainty in taxation of the Exit Tax for charitable trusts and institutions. The detailed draft rules cover the aspects of valuation of various assets held by the charitable trust or institutions. While the Exit Tax provisions were already into force with effect from 1 June 2016, the rules thereunder were yet to be prescribed. The date of applicability of rules and the suitable relief to past transactions would need to be clarified vide the final text of the rules. As a part of consultative process, CBDT seeks comments and suggestion from stakeholders and general public on the draft rules till 31 October 2016.
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