FEMA

Income Tax & FEMA Implications on Transfer of Equity Shares

.In India, transfer of shares between two residents of India involves payment of consideration. It is given by the buyer to the seller for which a Share Transfer deed is executed. In this blog, we will discuss the income tax and FEMA implications on the transfer of equity shares from NRI to Resident Indian Private Limited Company.

FEMA Implications on Transfer of Equity shares

Now let’s first discuss the FEMA implications on the transfer of equity shares from NRI to Resident Indian Private Limited Company;

How does Transfer of equity Shares take Place as per FEMA?

As discussed, a share transfer deed needs to be duly stamped @0.25% of the consideration amount. When the transaction is between a resident and a non-resident, there are regulations concerning inward and outward remittance of funds, valuation of shares and submission of Form FC-TRS.

With the increased pace of integrating the domestic market with the international market, it has
become very common to execute a share transfer agreement or technology transfer agreement or a blend of both. It is between Indian private company and Foreign/Non-Resident Indian.

Who Regulates the Investment made by NRI in India?

The Reserve Bank of India (RBI) through Notification No. FEMA 20(R)/ 2017-RB dated November 07, 2017, made Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 to regulate investment in India by a Person Resident outside India.

How can an Indian Company Receive Foreign Investment?

1. Under Indian foreign exchange regulations, general permission is available for the transfer of shares between non-residents (NR) and Indian residents (IR) by way of gift or sale under private arrangement or agreement.
2. Further, a non-resident (other than non-resident Indian (NRI) and overseas corporate bodies (“OCB”) may also transfer, by way of sale or gift, its shares or convertible debentures to any person resident outside India which will include NRIs but not OCBs. However, please note that in case an NRI wants to transfer shares from NRI to NR, then it will certainly require Reserve Bank of India (RBI) prior approval.

What are the Conditions on Transfer of equity shares from NR to IR or vice versa?

• activities of the Indian company are under automatic route;
• Sectoral limits which are defined under foreign direct investment policy are not breached;
• the total amount of sale consideration must be in compliance with the pricing guidelines; and
• any such transfer should not be subject to Indian Takeover Code;

In case a transfer does not meet any of the given above requirements, then prior approval of RBI will be mandatorily required.

What are the Procedural requirements under Foreign Exchange Regulations and the Companies Act, 2013 in regard to Transfer of equity Shares?

Requirement under Indian Foreign Exchange Regulations for Transfer of Shares from Non-residents to Residents are as follows:

An NR can transfer the shares by way of sale, shares of an Indian company under private arrangement to an IR which must be subject to the following:

• The amount of sale consideration must be determined as per the following pricing guidelines:

1. In case the company is a listed one: Sale consideration must not be more than the minimum price at which preferential allotment of shares is made under Securities Exchange Board of India (“SEBI”) Guidelines.
2. In case the company is unlisted: Sale consideration must not be more than the fair value of shares determined as per the standard pricing methodology on arm’s length basis. Also it must be duly certified by a Chartered Accountant or a SEBI registered Merchant Banker.

• Sale consideration must be remitted outside India through an authorized dealer (“AD”) bank.
• Transfer of shares must be reported in Form FC-TRS to RBI through an AD bank within 60 days of receipt of sale consideration.

The onus of submission of the said Form FC-TRS is on the transferor or the transferee who is a resident in India.

What are the documents required to be Submitted to the AD bank along with the Form FC-TRS?

(i) Consent letters signed by the transferor and the transferee which may include their duly appointed agent and also the details of the transfer, i.e. a number of shares to be transferred, the name of the investee company whose shares are being transferred with the price at which shares are being transferred.

(ii) Power of attorney authorizing the agent to purchase and sell the shares by the transferor or the transferee.

(iii) The shareholding pattern of the investee company before and after the transfer of shares must show equity participation of residents and non-residents category-wise.

(iv) In case the transferor is an NRI or the OCB, all the copies of RBI approvals which proves the shares held by them on repatriation/non-repatriation basis must be provided. The amount of sale shall be credited to non-resident rupee account.

(v) A Certificate from a Chartered Accountant must be provided which indicates the fair value of shares.

(vi) Undertaking from the transferee that all the pricing guidelines have been strictly adhered to.

(vii) No objection/ tax clearance certificate from the Income Tax Authority/ Chartered Accountant.

(viii) Settlement of all the transactions will attract payment of applicable taxes if any.

What are the requirements under Companies Act, 2013 for Transfer of Equity Shares?

Following are the requirements under Companies Act, 2013

(a) In order to transfer shares, an instrument of transfer called securities transfer form (STF) must be executed. The form is SH-4 which needs to be executed by transferor and transferee. The duly executed and signed SH-4 must be delivered to the company within two months of its execution. Stamp duty on the value of the shares needs to be paid in Indian rupees.

(b) Once the STF is registered with the company, the latter will then hold a Board meeting. After which they will transact the below following business:

1.  Approve and record the details of the transfer of shares, and
2.  Endorse the transfer on share certificate in favor of the transferee.

(c) The transferee or his agent must submit to the company a certificate in the Form FC-TRS endorsed by the AD bank. It states that the payment has been made by the transferee. As soon as the said certificate is received, the company may record the transfer in its books.

Income Tax implication on a transfer of equity shares

Now we will discuss the Income Tax implication on a transfer of equity shares from NRI to Indian resident Private Limited Company;

As per section 9(1)(i)(d) of the Income Tax Act, any income accruing or arising, whether directly or indirectly, through the transfer of a capital asset situated in India is deemed to accrue or arise in India.

Hence, capital gains from the sale of shares of an Indian company are taxable in the hands of an NRI.

The tax to be deducted at source by NRI shall be treated as Withholding tax.  Also a certificate has to be obtained from the Assessing Officer.

NRIs are not eligible for Indexation benefits and deductions. However, they can avail the benefits from DTAA (Double Taxation Avoidance Agreement).

Under DTAA, there are two methods to claim tax relief – Exemption method and Tax credit method.

In the exemption method, NRIs are taxed in only one country and exempted in another. In the tax credit method, where the income is taxed in both countries, tax relief can be claimed in the country of residence.

A special provision exempts NRIs from filing a tax return.  If their sources of income from India only include investment income and LTCG (Long Term Capital Gains).

Conclusion

Considering the scope of work is so wide and compliance of the same is a difficult process, it is not easy to comply with all the laws correctly and within time, and therefore it is always advisable to seek the help of experts to manage such compliances.