Investment Law

India’s New Rule for Computation of Short-Term Capital Gains to Increase Tax Liability for Businesses

On July 7, 2021, the Central Bureau of Direct Taxes (CBDT) notified new rule 8AC for computation of non-permanent capital positive aspects (STCG) and written-down fee (WDV) below Section 50 of the Income Tax Act, 1961.

The new rule lays out the computation techniques of STCG and WDV relevant for these organizations which have received depreciation on goodwill in the evaluation 12 months opening on April 1, 2020, given that depreciation can no longer be deducted on goodwill, as furnished by using the Finance Act 2021. This provision is retrospectively in impact from April 2020.

Experts agree that start-ups making ready for preliminary public presenting (IPO), and groups in the pharmaceutical region and lifestyles sciences region who have opted for mergers and acquisitions (M&) in the previous 5 years will most probably be impacted through the new rule. This is generally due to the fact agencies in these sectors, in particular unicorns, fetch full-size fees for their intangible components.

Exclusion of goodwill from the purview of an intangible property will lead to a discount in their typical valuation and extend their tax liabilities.

Rule 8AC: What are the implications for corporations?

This rule enforces the amended Section 50 of the Income Tax Act, which gives an approach for the computation of STCG and WDV in instances the place goodwill of an enterprise or occupation fashioned phase of a block of an asset for the evaluation 12 months starting on April 1, 2020, and depreciation has been got via the assessee beneath the Act.

If the cost of internet goodwill eliminated from the block is in extra of the opening WDV price as of April 1, 2020, such extra will now taxable as STCG. But in instances the place goodwill used to be the sole asset in the block, there will be no influence as per Section 55(2(a)) of the Income Tax Act.

Companies will now be required to calculate the tax on these temporary capital good points and pay it earlier than submitting the profits tax return (ITR) for economic yr 2021 (FY21). It is to be cited that the closing date for submitting the returns has been prolonged for businesses, from October 31, 2021, to November 30, 2021, due to the pandemic. To recognize greater about present-day closing dates and tax rules, refer to our article here: Tax Deadlines and New Income Tax Rules in India in 2021

How to decide the Written Down Value (WDV) applicable for evaluation 12 months 2021?

The WDV applicable to the evaluation 12 months (AY) 2021-22 shall be decided in the following manner:

Determine the opening WDV of a block of belongings as of April 1, 2020.

Add the genuine value of the asset (other than goodwill) obtained throughout the preceding year.

Deduct the quantity payable with recognition to any asset that is sold, destroyed, discarded, or demolished at some stage in the preceding year. The scrap value, if any, need to additionally be deducted.

Deduct the WDV of the assets, transferred below ‘slump sale’ falling beneath that block. (Slump sale capability the switch of one or greater undertaking, for a lump sum consideration besides values being assigned to the character belongings and liabilities in such sales)

Deduct the true value of goodwill after lowering depreciation allowed, falling inside the block.

Rule 8AC affords that if the authentic fee of goodwill after lowering depreciation (amount calculated at factor 5) exceeds the mixture of opening WDV (point 1) and the real value of asset obtained for the duration of the 12 months (point 2), such extra shall be deemed to be the capital good points bobbing up from the switch of non-permanent capital assets.

Why is the new rule brought?

The Finance Act, 2021 amended a number of provisions of the Income Tax Act to limit the deduction for depreciation on goodwill, with impact from April 2020, as goodwill will no longer be viewed as an intangible asset.

Section 2(11) of the Income Tax Act, which defines the time period “block of assets” was once amended to rule out the goodwill of an enterprise or career from the purview of “block of asset”.

Section 32(1(ii)) of the Income Tax Act used to be amended to take away the goodwill of a commercial enterprise or career from the definition of tangible belongings to make them ineligible for depreciation.

Section 50 of the Income Tax Act used to be amended to furnish a technique for computation of STCG and WDV, as may additionally be prescribed by way of the worried authority. Therefore, CBDT invoked its powers beneath this area to notify the new rule.

While making the amendments in the Finance Act 2021, it used to be discovered that usually, goodwill is no longer a depreciable asset, and relying upon the commercial enterprise profitability and operations, goodwill can also additionally ride perception or may additionally stay unchanged.

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