Tax Implications for Shares Issued at Premium: What You Need to Know!
When a company issues shares at a premium, the excess consideration received over the fair market value (FMV) of the shares can be taxable under certain conditions.
Key Points:
Taxability: The excess consideration received by a company on shares issued at a premium is chargeable to tax under the head “Income from Other Sources” if the shares are issued by a closely held company.
Conditions: The taxability applies when the consideration for the issue of shares exceeds the face value and FMV of the shares.
Exemptions: Certain exemptions are available for start-ups recognized by DPIIT and investments from notified entities.
Determining Fair Market Value:
Methods: The FMV of shares can be determined using the book value method or discounted cash flow (DCF) method prescribed in Rule 11UA.
Higher Value: The FMV shall be the higher of the value determined using the prescribed methods or the value substantiated by the company to the satisfaction of the Assessing Officer.
Implications for Companies:
Closely Held Companies: Need to be cautious when issuing shares at a premium to avoid unintended tax consequences.
Start-ups: Can claim exemptions from tax on excess consideration for shares issued at a premium if they meet specific conditions, such as aggregate paid-up share capital and share premium not exceeding â‚ą25 crores.
Documentation and Compliance:
Valuation Reports: Companies should obtain professional valuation reports to establish the FMV of their shares.
Board Resolutions: Proper board resolutions explaining the rationale for the share premium and basis of valuation should be maintained.
The tax rule on excess consideration for shares issued at premium can have several implications for start-ups and closely held companies in India:
Increased Compliance Burden: Companies may need to incur additional costs for professional valuation reports and documentation to support the FMV of their shares.
Tax Liability: Closely held companies may face tax liability if the excess consideration is deemed taxable, which could impact their cash flow and profitability.
Valuation Challenges: Determining the FMV of shares can be complex, especially for start-ups with unique business models or limited financial history.
Investor Expectations: Companies may need to negotiate with investors to ensure that the share price reflects the FMV, which could impact funding rounds.
Start-up Exemptions: Start-ups recognized by DPIIT can claim exemptions from tax on excess consideration for shares issued at a premium, providing them with more flexibility in raising capital .
Overall, the tax rule highlights the importance of proper valuation and documentation for companies issuing shares at a premium.
To ensure compliance with the tax rule on excess consideration for shares issued at premium, companies can take the following steps:
Obtain Professional Valuation Reports: Engage a qualified valuer to determine the FMV of shares, ensuring that the valuation is based on accepted methodologies and principles.
Maintain Proper Documentation: Keep detailed records of the valuation process, including assumptions, methodologies, and conclusions.
Board Resolutions: Pass board resolutions approving the issue of shares at a premium, with clear rationale and basis for the pricing.
Compliance with Regulatory Requirements: Ensure compliance with all relevant regulatory requirements, including filing necessary forms and returns with the Registrar of Companies and tax authorities.
Monitor Shareholding and Control: Closely monitor shareholding and control structures to ensure that the issue of shares at a premium does not lead to unintended tax consequences.
Seek Professional Advice: Consult with tax and corporate law experts to ensure compliance with all applicable laws and regulations.
By taking these steps, companies can minimize the risk of tax disputes and ensure that their share issuance complies with applicable laws and regulations.
Team: Credit Money Finance