In what could significantly increase the tax on unquoted equity shares, the Income Tax Department has proposed that such valuation should take into account the fair market value of jewellery, artistic works, shares and securities and stamp duty value in case of immovable property and book value for the rest of the assets.

Comments by May 19
The move follows insertion of Clause 50-CA this year in the Income Tax Act, 1961, to widen the scope of taxability of receipt of money or property with little or no consideration. In the draft rules issued on Friday, the Central Board of Direct Taxes (CBDT) has proposed that the fair market value of such unquoted equity shares will include the unquoted value of all assets (other than jewellery, artistic works, shares, securities and immovable property) and reduced by any amount paid as income tax, market price of the jewellery or artistic trust, value for payment of stamp duty on immovable property and the book value of liabilities.

“The stakeholders are requested to send their comments/suggestions on the draft notification by May 19,” said the CBDT.

The proposed valuation, which comes into effect from April 1, 2018, will be used to compute capital gains tax liability on such assets. Under the current provisions, the value adopted for stamp duty purposes can be substituted as the full value of consideration for computing capital gains on transfer of immovable property where the consideration received or accruing is less than such value.

Significant shift
Calling it a significant shift in the valuation of unquoted shares, tax experts hoped that the amendment is not made retrospectively from April 1, 2017. “The valuation norms for unquoted shares are proposed to be changed from book value basis to fair value basis. If any transaction in unquoted shares will now have to be carried out at its fair value and if done at lower than this, both buyer and seller will be liable to additional tax based on fair value,” said Abhishek Goenka, Partner & Leader — Direct Tax, PwC.