BMR DTC 2010 Capital Gains

8/6/2019 BMR DTC 2010 Capital Gains

1/4

Vol. 1 Issue 2 May 12, 2011

About BMR Advisors | BMR in News | BMR Insights | Events | Contact Us | Feedback

Capi ta l Gains An a l l new c lass i f ic at ion

As part of BMRs thought leadership initiatives, this bulletin, which is the second in a series

leading up to the legislation of the Direct Taxes Code Bill, 2010 (DTC), aims at

deconstructing and understanding the new legislation and to debate some of the issues

surrounding its introduction. This bulletin specifically looks at the capital gains tax provisions

in the DTC.

Under the Income-tax Act, 1961 (Act), capital gains/losses arises on a transfer of a capital

asset. A capital asset has been defined to mean any property of the taxpayer, whether or not

such property is connected with the business of the taxpayer, but excludes stock in trade,

consumables and raw materials held for the purpose of the business of the taxpayer.

The provisions of the DTC propose a paradigm shift with regards to the scope of capital gains

taxation. Under the DTC, capital gains/losses arise only on the transfer of investment

assets.

What are inves tm ent assets?

From the manner in which the term investment assets has been defined in the DTC, it

appears that the category of investment assets is significantly narrower as compared to the

current category of capital assets under the Act.

The DTC defines investment assets to mean

Securities held by Foreign Institutional Investors (FII);

A business undertaking/division of the taxpayer; and

All capital assets which are not business capital assets.

Therefore, transfer of capital assets connected with the business of the tax payer, which are

currently covered under the capital gains provisions of the Act are specifically kept out of the

scope of capital gains tax under the DTC. Hence, it appears that any gain/loss made from the

transfer of business related capital assets would now get covered under the head income

from business and not capital gains. The meaning of business capital assets would

therefore, assume significance.

The term business capital asset has been defined under the DTC to mean any capital asset

self generated in the course of business, any intangible asset related to the business

(goodwill, trade mark/brand name, right to manufacture/carry on business, tenancy rights,

licence, permits, etc), tangible assets like building, plant, machinery, furniture and any other

capi t a l asset , not be ing land, connec ted w i th or used for the purposes of

any bus iness of the tax payer .

This definition of business capital asset and particularly the residuary clause highlighted

above is wide and can potentially have large ramifications.

Classi f icat ion issue

This discussion leads us to the issue whether all the capital assets of a business concern

would be regarded as business capital assets under the DTC?

Taxand conducted Global Survey

2011 Taxand the CFO. Click

here to view full research findings.PERE together with Taxand

produced the 2011 global guide to

tax, advising on real estateinvestment opportunities. Click

here to view guide.BMR Advisors, in association

with, IPPAI, has produced a

survey report "Impact of Taxation

on the Energy Value Chain &

Electricity Prices in India",

analyzing the present regulatory

and policy framework for the

energy sector . Click here to view

report.

Click here to view archived

webinar Insights into the India

Budget 2011

BMR Advisors is ranked secondMost Active Transaction Advisor

(Private Equity) according to the

Venture Intelligence League Table

for the first quarter of 2011BMR wins India Case of the Year,

and Best Use of the Internet

awards at 5th International Tax

ReviewAsia Awards, 2010.BMR is ranked Tier 1 in ITRs

World Tax 2011 guide, to theWorlds leading tax firms.BMR is rated Great Place to Work

2010; Great Place to Work Institute

Kalpesh Maroo

Sharath Rao
http://www.bmradvisors.com/about-bmr.phphttp://www.bmradvisors.com/news.phphttp://www.bmradvisors.com/thoughtleadership.php?cat_id=229http://www.bmradvisors.com/upcoming-events.phphttp://www.bmradvisors.com/contactus.phpmailto:[email protected]://bmradvisors.com/research.php?cat_id=79http://bmradvisors.com/research.php?cat_id=79http://bmradvisors.com/research.php?cat_id=79http://bmradvisors.com/thoughtleadership.php?cat_id=230http://bmradvisors.com/thoughtleadership.php?cat_id=230http://bmradvisors.com/thoughtleadership.php?cat_id=230http://bmradvisors.com/thoughtleadership.php?cat_id=230http://bmradvisors.com/thoughtleadership.php?cat_id=230http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://www.internationaltaxreview.com/Web-Seminars.htmlhttp://www.internationaltaxreview.com/Web-Seminars.htmlhttp://www.internationaltaxreview.com/Web-Seminars.htmlhttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.itrworldtax.com/JurisdictionFirm/5201/9/BMR-Advisors---Taxand.html#Jurisdiction63http://www.itrworldtax.com/JurisdictionFirm/5201/9/BMR-Advisors---Taxand.html#Jurisdiction63http://www.itrworldtax.com/JurisdictionFirm/5201/9/BMR-Advisors---Taxand.html#Jurisdiction63http://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phpmailto:[email protected]:[email protected]:[email protected]:[email protected]://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.itrworldtax.com/JurisdictionFirm/5201/9/BMR-Advisors---Taxand.html#Jurisdiction63http://www.itrworldtax.com/JurisdictionFirm/5201/9/BMR-Advisors---Taxand.html#Jurisdiction63http://www.itrworldtax.com/JurisdictionFirm/5201/9/BMR-Advisors---Taxand.html#Jurisdiction63http://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.bmradvisors.com/recognitions.phphttp://www.internationaltaxreview.com/Web-Seminars.htmlhttp://www.internationaltaxreview.com/Web-Seminars.htmlhttp://www.internationaltaxreview.com/Web-Seminars.htmlhttp://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/research.php?cat_id=79&archive=3http://bmradvisors.com/thoughtleadership.php?cat_id=230http://bmradvisors.com/thoughtleadership.php?cat_id=230http://bmradvisors.com/thoughtleadership.php?cat_id=230http://bmradvisors.com/thoughtleadership.php?cat_id=230http://bmradvisors.com/thoughtleadership.php?cat_id=230http://bmradvisors.com/research.php?cat_id=79http://bmradvisors.com/research.php?cat_id=79http://bmradvisors.com/research.php?cat_id=79mailto:[email protected]://www.bmradvisors.com/contactus.phphttp://www.bmradvisors.com/upcoming-events.phphttp://www.bmradvisors.com/thoughtleadership.php?cat_id=229http://www.bmradvisors.com/news.phphttp://www.bmradvisors.com/about-bmr.phphttp://www.bmradvisors.com/http://www.bmradvisors.com/thoughtleadership.php?cat_id=281


2/4

As the term connected with can bring within its ambit any capital asset that has some

connection with the business of the tax payer, the definition of business capital assets seems

to be an all encompassing one. Adding to this issue is that the term business has also been

widely defined to include any trade, commerce or manufacture; or any adventure or concern

of that nature or any profession or vocation.

A question which arises is if a commercial concern (say a Company) is seen as always being

set up with some commercial intent (primary or incidental), would all the assets of such a

concern then be regarded as business capital assets, irrespective of how connected they are

with the main business of the tax payer?

In deciding this question, one could argue that the aspect of proximity of the asset with the

main business of the tax payer has to be checked before concluding on whether the asset is a

business capital asset or otherwise. Conversely, one could also argue that the definition of

business is very wide and all activities of a concern (barring probably one-off activities) could

potentially be classified as a business and by implication all assets used or connected with

such activities could be classified as business capital assets.

Clearly, the classification of assets into business capital assets and investment assets is,

potentially, going to be an area of significant dispute going forward.

Impac t

The classification of income from the sale of assets into income from sale of business capital

assets and income from sale of investment assets is important since under the DTC, as is the

case of the Act, income is classified under different heads (such as capital gains, income from

business, etc) and the computation machinery, exemptions available, etc are separately

provided for each head of income. Discussed below are some of the potential consequences

arising on account of the classification issue -

a) Tax neutral transactions

In case of tax neutral transactions like corporate restructuring involving amalgamations,

de mergers, etc, the capital gains tax exemption applies to only investment assets.

Hence, while the assets being transferred by the transferor companies may qualify for

the exemption (since an undertaking or a division of a business is treated as an

investment asset), the shareholders of such companies receiving shares in the

transferee company may not qualify for the exemption unless the shares held by them

qualify as investment assets. Similar question arises when assets are transferred

between a holding company and its wholly owned subsidiaries or when assets are

distributed by a liquidating company to its shareholders. Assets involved in a gift or

inherited under a will also have similar implications.

b) Shares and investments held by investment companies, holding companies and FIIs

For an investment company or a group holding company whose assets consist primarily

of shares and securities of other companies, there is high likelihood of such assets not

being regarded as investment assets as the principal business activity of such entities

would be to hold shares in various companies.

For offshore holding companies, this would raise interesting issues regarding the

eligibility of such companies to rely on the capital gains tax relief under certain Tax

Treaties (Treaty). As a general principle, if the relevant article in the Treaty dealing with

capital gains, specially deals with the treatment of income on the transfer of an asset

(such as shares), then the taxability would be on the basis of such an article as against

examining taxability under a more general head such as business income,

notwithstanding the fact that under the DTC, the income of such a non resident may be

taxable as business income. Needless to say that the ultimate eligibility in each instance

Mukesh Butani, New Delhi+91 124 339 5010mukesh.butani@bmradvisors.

comRajeev Dimri, New Delhi+91 124 339 [email protected]

Bobby Parikh, Mumbai+91 22 3021 7010

[email protected]

Abhishek Goenka, Bangalore+91 80 4032 0100abhishek.goenka@bmradvisors.

comSriram Seshadri, Chennai+91 44 4298 7000sriram.seshadri@bmradvisors.

comAmod Khare, Singapore+65 6408 [email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


3/4

would need to be determined based on specific language of the Treaty and the facts on

hand.

Curiously, securities held by FIIs are specifically defined to be an investment asset. Such

a specific classification would add an interesting angle to the current debate of

classification of the income earned by FIIs into business income or capital gains. Several

FIIs operating out of countries such as US, UK currently claim shelter under the business

income article on the basis that they dont have a permanent establishment in India.

Given the specific classification of their income as capital gains under the DTC, the

eligibility of such FIIs to rely on the business income article under the DTAA going

forward would be a significant challenge for many of these FIIs.

c) No indexation of the cost of acquisition/improvement

If an asset is not classified as an investment asset it would mean that the cost of

acquisition of such assets will not be indexed (an adjustment for inflation), which

otherwise is available for certain investment assets under the DTC. This could have far

reaching consequences for assets which are currently held as capital assets and which

have assumed significant value over their holding period. The issue is accentuated in

these cases as there is no transitionary provision that applies to assets that get the

capital gains treatment under the current Act but could become business capital assets

under the DTC.

d) No beneficial treatment for shares and securities sold on which Securities Transaction

Tax applies

Under the DTC, for shares and securities (held as investment assets) which are sold on

a recognized stock exchange in India on which Securities Transaction Tax (STT)

applies, there is standard deduction of 100% (if the securities are held for more than a

year) or 50% (if the securities are held for less than a year). Therefore, if as per the

classification rule, shares and securities are not categorized as investment assets, but as

business capital assets, the standard deduction will not be available.

Conclus ion

The classification issue seems to have the potential of creating a substantial shift in the

treatment of gains/losses arising from the transfer of capital assets. While there are

other issues within the capital gains taxing provisions (which we will discuss in our

forthcoming bulletins), all these recede to the background in comparison with the

classification issue. While the legislative change in the asset classification seems to be

a conscious decision, it is hoped that the fallout of such a change in classification,

including on the tax neutrality of certain transactions and Treaty characterization are

thought through and considered before the final draft of the DTC is released.

Disclaimer:

This newsletter has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of preparation and does notexpress views or expert opinions of BMR Advisors. The newsletter is meant for general guidance and no responsibility for loss arising to any person acting orrefraining from acting as a result of any material contained in this newsletter will be accepted by BMR Advisors. It is recommended that professional advicebe sought based on the specific facts and circumstances. This newsletter does not substitute the need to refer to the original pronouncements.

Quality tax advice, globallywww.taxand.com

Contact Us | Archives

BMR Advisors | 22nd Floor | Building No. 5 | Tower A | DLF Cyber City I DLF Phase III I Gurgaon 122 002Tel: +91 124 339 5000 | Fax: +91 124 339 5001
http://www.bmradvisors.com/contactus.phphttp://www.bmradvisors.com/thoughtleadership.php?cat_id=143http://www.bmradvisors.com/thoughtleadership.php?cat_id=143http://www.bmradvisors.com/contactus.phphttp://www.taxand.com/http://www.bmradvisors.com/


4/4

The information contained in this communication is intended solely for the use of the individual or entity to whom it is addressed and others authorized toreceive it. This communication may contain confidential or legally privileged information. If you are not the intended recipient, any disclosure, copying,distribution or action taken relying on the contents is prohibited and may be unlawful. If you have received this communication in error, or if you or youremployer do not consent to email messages of this kind, please notify us immediately by responding to this email and then delete it from your system. Noliability is accepted for any harm that may be caused to your systems or data by this message. Unless related to BMR business, the opinions, conclusions andother information contained within this email are those of the sender alone and do not necessarily constitute those of the Firm.

Copyright 2011, BMR Advisors. All Rights Reserved
http://twitter.com/bmradvisors

Documents

BMR DTC 2010 Capital Gains