Broadly talking, the genesis of taxing items in India began with the introduction of the Reward Tax Act, 1958. The Reward Tax Act adopted a ‘donor based mostly’ taxation, whereby the items had been taxed within the arms of the donor at a flat charge of 30% with a fundamental exemption of 30,000. The Reward Tax Act was repealed with impact from October 1998 and the donor in addition to the recipient weren’t required to pay taxes on the items given / obtained. This was an enormous change within the tax regime vis-à-vis items.
Reintroduction of Reward Tax within the Earnings Tax Act, 1961
Elimination of reward tax witnessed distribution of property (each movable and immovable) and earnings freely, leading to tax planning and in some circumstances even tax avoidance. Accordingly, to curb incidents of tax avoidance, taxation of items was re-introduced within the Finance Act (No.2) 2004, with impact from 1 April 2005. This time, nevertheless, the emphasis shifted from ‘donor-based’ taxation to a ‘donee-based’ taxation, i.e. the earnings from reward(s) grew to become taxable within the arms of the recipient.
Through the years, the regulation associated to taxation of items has undergone many modifications and its scope has widened. Initially, solely people and Hindu Undivided Households (HUFs) had been coated throughout the ambit of taxation underneath the Earnings Tax Act vis-à-vis items. At present, the scope is large sufficient to cowl all ‘individuals’ who’re in receipt of specified items above the prescribed threshold limits.
Curiously, for tax functions, ‘individual’ consists of a person, HUF, firm, agency, an affiliation of individuals, a physique of people, a neighborhood authority, a synthetic juridical individual, and so forth.
Taxability of items underneath the I-T Act
As per the present tax regulation, any individual (donee / recipient) receiving a sum of cash, or an immovable property or every other specified property from every other individual (donor) with out consideration or for an insufficient consideration i.e. lower than the honest market worth of the property or stamp responsibility worth in case of an immovable property, is liable to be taxed on the worth of such reward.
Within the above context the ‘property’ consists of immovable property being land or constructing or each, shares and securities, jewelry, archaeological collections, drawings, work, sculptures, any murals and bullion, and so forth.
Exemptions have been carved out for sure specified classes of individuals / recipients from the purview of taxation from items. Firms underneath sure specified schemes of reorganization too have been exempted from the above incidence of tax.
Exemptions from taxation
Under is an illustrative record of kinds of receipts which might be particularly exempted from qualifying as items and consequentially, from the incidence of tax thereon:
•Any sum of cash or any property obtained from a specified relative on any event.
Within the above context, it has been clarified that ‘relative’, in case of a person shall embrace his/her partner, partner’s siblings, siblings of both of the dad and mom of the person, any lineal ascendant or descendant of the person, the person’s siblings, partner of the person’s siblings, any lineal ascendant or descendant of the person’s partner, partner of the lineal ascendant or descendant of the partner of the person. In case of a HUF, relative consists of any member of the HUF.
•Any sum of cash or any property obtained from any individual on the event of the wedding;
•Any sum of cash or any property obtained underneath a will or by the use of inheritance;
•Any sum of cash or any property obtained in contemplation of demise of the payer;
•Any sum of cash or any property from a person by a belief created or established solely for the good thing about relative of the person; and so forth.
FEMA laws governing items
It’s pertinent to notice that moreover the earnings tax provisions, in case of any cross-border items like those involving non-resident Indians (NRI) or individuals of Indian origin (PIO), the provisions underneath the Overseas Trade Administration Act, 1999 (FEMA) also needs to be examined.
One specific facet that requires cautious analysis is the distinction in the best way ‘relative’ is outlined underneath the Earnings Tax Act vis-à-vis FEMA. Whereas the Earnings Tax Act exempts items between relations (as talked about above), the that means of the time period ‘relative’ underneath FEMA is far narrower and restricted to incorporate partner, father, mom, son, son’s spouse, daughter, daughter’s husband, brother and sister of the person.
For example the above:
If A and B are sisters and H, the husband of B, items any property to A, the identical wouldn’t be taxable underneath the Earnings-tax Act within the arms of the recipient. Nonetheless, it might not be permitted underneath FEMA contemplating the slender definition of the time period ‘relative’.
Whereas the ideas vis-à-vis items are largely ruled by home laws, transactions with NRIs and PIOs want a extra cautious analysis from a FEMA perspective. Fairly often ignorance of FEMA, being a specialised area space, might result in default in compliances that are easy to execute however have extreme non-compliance penalties. Therefore, whereas a comparability will be drawn between FEMA laws and the Act vis-à-vis items’ legal guidelines, a presumption have to be prevented.
One other necessary consideration that’s typically missed because of the ignorance of FEMA laws is the ceiling prescribed on remittances to and from the nation. It is very important concentrate on the quantity of remittances that may be made/ obtained, particularly outbound, because the ceilings might pose a critical problem to the execution/ implementation of the Reward transactions.
To elucidate, underneath the Liberalized Remittance Scheme (LRS) of FEMA, a resident particular person can remit as much as $250,000 outdoors India in mixture per monetary yr on account of permissible present and capital account transactions which embrace items (not essentially to a relative).
Something not particularly permitted/quantity past the desired limits underneath FEMA would require permission from the Reserve Financial institution of India (RBI).
Implications in abroad jurisdiction
In case of cross-border items, moreover the tax and regulatory implications underneath the Indian legal guidelines, additionally it is necessary to judge the implications, if any, underneath the tax and regulatory legal guidelines within the abroad jurisdiction of the nation of recipient i.e. whether or not the reward obtained can be taxable or must be disclosed to any authorities outdoors India. To sum up, whereas the evolution of regulation over time has led to taxability of items, particular exemptions have been carved out to insulate real transactions like between the relations, on the event of marriage, and so forth. It is very important concentrate on legal guidelines and be compliant with laws to de-risk from any publicity and implications and keep away from lengthy drawn disputes and litigations.
What’s the threshold restrict for financial items to be thought of as a taxable earnings for the recipient?
Financial items would come with items in money, cheques, financial institution deposits, draft, and so forth. Any such reward can be taxable in full within the arms of the recipient if it exceeds 50,000 in the course of the monetary yr.
The place is taxable earnings from reward disclosed within the tax return?
Earnings from reward is included within the earnings reported underneath the pinnacle ‘earnings from different sources’ and varieties a part of the taxable earnings.
Pallavi Talavlikar and Sameer Shah contributed to this text.
Vikas Vasal is nationwide chief tax–Grant Thornton India LLP. You possibly can ship your queries to firstname.lastname@example.org
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