Sale/Transfer of Unquoted Shares – Get your valuation right!
When an owner of Unquoted share ("Shares") in a Company transfers the shares to any person, he is required to pay Capital Gain tax on the difference between the sale consideration received by him and the cost of acquisition of such shares (or the inflation indexed cost, wherever applicable).
It is important to check if the "Sale consideration" that he receives from the buyer is at least equal to or more than the "Fair Market Value" ("FMV")as defined under Rule 11UA of The Income Tax Rules, of the shares sought to be transferred.
As defined under Rule 11UA, the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under (a) or (b), at the option of the assessee, namely; -
The fair market value of unquoted equity shares shall be calculated simply by ascertaining "Book value of Assets (Less) Book value of Liabilities."
- For ascertaining the book value of assets, following amounts shall be excluded:
- Advance Tax, Tax deduction or collection at source or any amount of tax paid as reduced by refund claimed under the Income Tax Act.
- Any unamortized amount of deferred expenditure which does not represent the value of any asset.
- For ascertaining the book value of liabilities, following amounts shall be excluded:
- the paid-up capital in respect of equity shares;
- the amount set apart for payment of dividends on preference or equity shares
- reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
- any amount representing provision for taxation, other than amount of tax paid as reduced by the amount of tax claimed as refund
- any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
- any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.
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