Within this framework, family businesses have flourished, leveraging not just financial capital but also familial bonds and shared values to achieve success over generations.
Alongside the benefits of familial collaboration come inherent challenges, particularly the complexities arising from cross-holdings and intergenerational dynamics within family-owned enterprises. These complexities can lead to disputes over ownership, management control, and wealth distribution, threatening both business continuity and harmony.
Indian families utilise family settlements to navigate challenges, ensuring equitable distribution of wealth and assets among members. A family settlement is a structured agreement aimed at amicably resolving disputes, thereby preserving family unity and minimising legal complexities.
By proactively addressing conflicts through formal asset division and clear delineation of responsibilities, families mitigate the risk of prolonged legal battles. This approach not only safeguards financial interests, but also reinforces cultural values of an Indian joint family.
Furthermore, family settlements play a pivotal role in ensuring business continuity by providing clarity on succession planning, management roles, and ownership rights. This strategic clarity is crucial for the sustainable growth of family enterprises across generations.
Serving as a pragmatic solution, family settlements offer a structured framework for both wealth distribution and conflict resolution. By embracing this practice, Indian families uphold their legacy of unity and resilience, while securing the future of their business endeavours.
Anti-abuse laws in I-T Act
There are anti-abuse laws in the Income Tax Act, which provides for tax on a person receiving a property from any person at less than its fair market value (FMV). The difference between transaction price and the FMV is taxable in the hands of the recipient. “Property” for this purpose can include land, building, shares and securities, jewellery, bullion, or any work of art.
There are, however, exclusions from these anti-abuse provisions like gifts received from blood relatives, property received under a will or inheritance, property received on total or partial partition of a Hindu undivided family, to name a few.
While principally, these provisions are designed to prohibit transfer of properties which are disguised as gifts or to prevent tax evasion through undervalued transfers of existing property and accordingly tax is on the recipient treating transfer price of the property to be equal to the FMV.
Since the provisions are widely worded with very limited exclusions therefrom, the same are misapplied even in case of genuine transactions where taxing the recipient on FMV defeats the objective for which the provisions were introduced in the first place.
In absence of specific exclusion, transfer of properties among family members pursuant to a family settlement attracts the rigours of these anti-abuse provisions.
Suggestions for the government
Family settlement is essentially just realignment of ownership of family assets among members, who already have antecedent rights in those assets. However, in the absence of an express concession of a family settlement from the anti-abuse provision, one has to rely on some judgements which travel beyond the prescriptive law.
This is potentially fraught with risk, and prevents families to smoothly settle. To secure tax neutrality for such settlements, it is imperative to advocate for the formal exclusion of family settlements from tax obligations through proactive engagement and legislative clarity.
This strategic initiative aims to uphold the integrity and significance of family arrangements within legal frameworks while promoting clarity and fairness in taxation policies.
The government should explicitly ensure that transactions conducted under a family settlement agreement should not be subjected to anti-abuse provisions.:
- Transfer of properties within family members shall not trigger anti-abuse provisions.
- In this regard, it may also be clarified that gift of properties even between extended family members will also not be taxed.
- When shares are issued below FMV as part of a family settlement, the said anti-abuse provisions may be triggered in the hands of the acquirer. Therefore, acquiring shares in family-owned business through fresh issuance of shares to realign ownership should also specifically be excluded from the rigours of anti-abuse provisions.
In conclusion, the said provision was introduced to prevent misuse of gifts for tax evasion. However, family settlements, recognised by courts as legitimate ways to manage familial affairs, such as equitable asset distribution among family members or compliance with specific contractual terms, should not be subject to fetters of valuation hurdles. Such hurdles were aimed to prevent tax avoidance schemes, not to penalise legitimate and bona fide arrangements.
—Rakesh Nangia is non- executive chairman, and Vishwas Panjiar is a partner at Nangia Andersen LLP