Finance Bill 2024: Key Changes to Section 56 Taxation on Share Premium

Proposed Amendment to Section 56 of the Income-tax Act through Finance Bill 2024

The Finance Bill 2024 aims to amend Section 56 of the Income-tax Act, specifically targeting clause (viib) under sub-section (2). This clause, introduced by the Finance Act of 2012, mandated that companies not substantially interested by the public pay tax on any excess consideration received for shares issued above their face value. This excess was deemed income from other sources.

Key Changes in Clause (viib)

1. Elimination of Tax on Share Premium:

   • Effective April 1, 2025, clause (viib) will be rendered inapplicable. This means companies will no longer face taxation on premiums received from issuing shares above their nominal value from the assessment year 2025-26 onwards.

2. Impact on Investment and Business Operations:

   • This amendment is designed to simplify tax compliance and potentially foster investment in private companies by alleviating outdated tax burdens.

Details of the Amendment

The proposed amendment to Section 56 includes the following changes:

• Current Provisions under Clause (viib):

  • Under the existing law, when a private company receives consideration for share issuance from a resident that exceeds the face value, the amount that surpasses the fair market value is taxed under “Income from other sources”.
  • Exemptions currently exist for:
    • Venture capital undertakings receiving consideration from venture capital companies or funds.
    • Companies receiving consideration from specified classes of persons as notified by the Central Government.

• Proposed Changes:

  • The amendment will establish that clause (viib) shall not apply starting April 1, 2025, effectively removing these taxation provisions for new assessments from the 2025-26 fiscal year.

Conclusion

The Finance Bill 2024 proposes a significant shift in the taxation landscape for private companies by amending Section 56. By repealing the tax implications of share premiums, this move aims to enhance the ease of doing business and invigorate the private sector. The amendment will take effect from April 1, 2025, providing companies with a clearer pathway for capital raising without the hindrance of additional tax liabilities.