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We has seen how you can turn yourself into a businessman, a builder, or can be treated as one, even in a development agreement and can gain or lose tax-wise depending on whether you have planned for it or not.
There is another interesting aspect of tax law that deserves discussion. This is one of the other loopholes plugged by the government in the law relating to capital gains. .
You owned an asset which you have agreed to introduce as your capital in a partnership which you have agreed to join with some other persons. On your introduction of the asset into the firm, it stops being your property and the firm owns it. When you so introduce an asset into the partnership, you receive no consideration but a share in the firm. This, however, is not a direct consideration for the asset. As such, there would be no capital gains levied in your hands. Moreover, after such introduction if you had retired from the firm there again was no transfer of the asset - it remained with the firm. This was the legal position a few years back which led many people to enter into partnerships, even if not real, and then retire later on. Capital gains tax got avoided legally and surely.
Government plugged this loophole as well. It has amended the law to say that if you introduce your asset into a partnership firm, it will be treated as a transfer and the amount entered to the credit of your account in the firm's books would be treated as consideration for such transfer. Capital gains would be computed based on such consideration. This amendment has led to a substantial reduction in the fake partnerships that were created to avoid tax.
But if you are entering into partnerships for development of property owned by you, the amended law is important to be understood as it can affect your taxes unexpectedly
According to the law as it stands today, if you become a partner of a partnership firm and introduce any capital asset owned by you as your capital or otherwise, then such introduction is to be treated as a transfer by you to the firm. The amount recorded in the books of account as the value of the asset is to be deemed to be the consideration for such transfer. You are charged to tax on such transfer and consideration.
The most critical aspect of the current law is the one fixing consideration. The consideration for such transfer is the amount recorded in the books of account of the firm as the value of the property introduced by you. It is not the market value of the property
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No law dictates you on the amount that you should record in the books of the firm as the value of the property. Besides, the value recorded in the books does not revolve around anything. You are free to record whatever value you and your partners decide and not necessarily the market value
The market value you record in the books will be the basis on which you will pay capital gains tax
Suppose a partnership owns property whichever manner it had acquired it - by purchase, by introduction by a partner, or whatever. Now, if the partnership is dissolved and one or more partners take over the property. In good old days, there was no transfer on such dissolution and hence no capital gains were taxable. After the amendments, there is a deemed transfer of all assets held by the firm on dissolution and capital gains tax is payable
For this purpose, the market value of the assets on the date of dissolution is considered to be the consideration in the hands of the partner/s. Capital gains have to be computed accordingly
This is an extremely unfair situation and can affect all firms even if the firm is not avoiding any tax. Even if the firm does not own immovable property. Even if no partner has introduced any property into the firm as his capital. Thus:
Warning: Let not a firm be dissolved by default. It can be dangerous to your financial health
This law of dissolution does not operate when you, a partner, retire from a firm and specially when you receive no property in settlement.
Any person joining a firm as a partner can bring in any asset into the firm as his capital. Even an immovable property. When such an introduction into the firm is made, there is no transfer in general law. Thus, while property passes from the you to the firm there is no transfer requiring a document other than a partnership deed - no agreement to transfer, no sale deed. This helps save obnoxious stamp duty and registration charges - which can be substantial and as high as 15% of the value of property in some states.
Remember that this is a damn good reason to still adopt this route if you are actually entering into a partnership even if you don't save on income tax. Provided, however, that the state in which you do this has not amended its local laws levying stamp duty on such introduction. Andhra Pradesh has not done so, yet.
There can be cases where you may find that joining a builder as a partner may save you tax. Should you then do so instead of entering into a development agreement which is what you originally intended? Should you adopt an artificial route to save tax?
Merely from the practical point of view, the answer is a firm No. The implications of adopting a course different than your actual understanding can have devastating results. This is because, the manner in which you structure your understanding, draft documents gives legal rights to all parties which will be different from the actual understanding. Such legal rights can have unexpected and difficult consequences. The price you may pay can be much heavier than the tax you may save.
My advice, always, is this: avoid artificial transactions. They can be dangerous to your financial health
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