The concept of taxing premium on issue of shares was brought in to the statute by Finance Act, 2012 with effect from 1st of April, 2013 by inserting section 56(2)(viib) in the Income Tax Act, 1961. The said section primarily provided for taxation of premium received on issue of shares, in excess of the fair market value of the said shares, to be treated as income from other sources and was brought to tax accordingly.
The said provision was misconceived right from its inception and created a lot of hurdles in raising capital, especially for start-ups where valuations at which the shares were to be issued could not be justified in accordance with section 56(2)(viib) as well as rules framed thereunder.
The constitutional validity of the said clause also appeared doubtful although the same was not tested before any court. In any case the said clause was creating a lot of hardships not just to the start-ups but to the other companies as well.
The Finance Bill, 2024 proposes to put a sunset clause in the said section thereby making it inoperative with effect from 1st of April, 2025. Needless to say, that it is a welcome step and the corporate would definitely be appreciative of the said deletion. In other words, premium to any extent received by a company at the time of issue of shares will not be taxed as income henceforth, which removes a bottleneck for start-ups as well as other companies.
In accordance with the explanatory memorandum, the clause becomes inoperative with effect from A.Y 2025-26. Implying, thereby that the clause (viib) of Section 56(2) shall not apply to premium on issue of shares received after 01.04.2024. Although the proviso added to the section may lead to an alternate interpretation.