Gift tax

Gift tax

Subject : Economy

Context:

The Supreme Court ruled that shares within the lock-in-period are not ‘quoted shares’, and thus they need to be valued as ‘unquoted shares’ to determine the gift tax liability.

Details:

• The issue related to whether the gifting of the promoter’s locked-in shares should be treated as quoted or unquoted shares for the purpose of valuing the gift for taxability under the Gift Tax Act, 1958.
• SC held that the equity shares being under the lock-in period could not be traded and, therefore, remained unquoted in any recognised stock exchange.

Concept:

Quoted shares

• Wealth Tax Act a quoted share in relation to an equity share or a preference share means a share quoted/listed on any recognised stock exchange with regularity from time to time.
• The quotations of such shares are based on current transactions made in the ordinary course of business.
• Investment instruments (such as shares, bonds, debentures) that is officially listed on a stock exchange for public trading

Unquoted share

• An ‘unquoted share’ is simply a share that is not a quoted share.
• A share  may become unquoted if the market capitalization of its issuing company falls to the point that it no longer meets an stock exchange’s listing requirements.

Gift tax:

• The genesis of taxing gifts in India started with the introduction of the Gift Tax Act, 1958. 
  • The Gift Tax Act followed a ‘donor based’ taxation, wherein the gifts were taxed in the hands of the donor at a flat rate of 30% with a basic exemption of 30,000.
• The Gift Tax Act was repealed with effect from October 1998 and the donor as well as the recipient were not required to pay taxes on the gifts given / received.
• Reintroduction of Gift Tax in the Income Tax Act, 1961
• Its emphasis shifted from ‘donor-based’ taxation to a ‘donee-based’ taxation, i.e. the income from gift(s) became taxable in the hands of the recipient.
• As per the current tax law, any person (donee / recipient) receiving a sum of money, or an immovable property or any other specified property from any other person (donor) without consideration or for an inadequate consideration i.e. less than the fair market value of the property or stamp duty value in case of an immovable property, is liable to be taxed on the value of such gift.
• Property includes immovable property being land or building or both, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art and bullion, etc.
  • Gift of movable property such as shares, ETFs, mutual funds, jewellery, drawings etc without consideration and exceeding Fair Market Value of more than INR 50,000 is taxable in the hands of the recipient under Section 56(2) of the Income Tax Act.
• Exemptions from taxation
  • Any sum of money or any property received from a specified relative on any occasion.
  • Any sum of money or any property received from any person on the occasion of the marriage;
  • Any sum of money or any property received under a will or by way of inheritance;
  • Any sum of money or any property received in contemplation of death of the payer;
  • Any sum of money or any property from an individual by a trust created or established solely for the benefit of a relative of the individual; etc.