Section 56 (2)(viib) Is Applicable On Government Related Investors, Banks Involved In Insurance Business, Etc.: CBDT

The Central Board of Direct Taxes (CBDT) has notified the class of persons/entities on which Section 56 (2)(viib) of the Income Tax Act.

The words "being a resident" have been proposed to be removed from section 56(2)(viib) with effect from 01 April 2024 in the Finance Bill 2023. Therefore, if this section were to become law, it would apply to any non-resident who makes an investment in equity shares of a privately held Indian company.

According to section 56(2)(viib), if a company receives, in any previous year, any consideration for the issue of shares that exceeds the face value of such shares from any person who is a resident, the aggregate consideration received for shares that exceed the fair market value of the shares shall be deemed to be the income of the concerned company chargeable to tax under the head Income from other Sources for the relevant financial year.

The Board has notified that Section 56 (2)(viib) is not applicable to Government and Government related investors such as central banks, sovereign wealth funds, international or multilateral organizations or agencies including entities controlled by the Government or where direct or indirect ownership of the Government is seventy-five percent or more. Banks or Entities involved in Insurance Business where the entity is subject to applicable regulations in the country where it is established or incorporated or is a resident.

Any entity, which is a resident of any country or specified territory, and entity is subject to applicable regulations in the country where it is established or incorporated or is a resident. Entities registered with the Securities and Exchange Board of India as Category-I Foreign Portfolio Investors. Endowment funds associated with a university, hospitals, or charities. Pension funds created or established under the law of the foreign country or specified territory. Broad-Based Pooled Investment Vehicle or fund where the number of investors in a vehicle or fund is more than fifty and the such fund is not a hedge fund or a fund that employs diverse or complex trading strategies.

Notification No. 29/2023

Date: 24/05/2023

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