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BW Businessworld

Succession Planning Off Market? Not Really!

Whether selling the business, keeping the business in the family or transitioning leadership to identified heirs or non-family stakeholders, the issues faced by family business houses have perennially been immense and complicated

Photo Credit : Reuters


Whether selling the business, keeping the business in the family or transitioning leadership to identified heirs or non-family stakeholders, the issues faced by family business houses have perennially been immense and complicated.

Many challenges are unique to family businesses because of the emotional ties between family members, hesitation in communication, generation gaps, mistrust, etc. Hence, defining, developing and implementing a succession plan that specifies the handling of uncertainties of succession is crucial.

Recognising these issues, family businesses in past few decades have begun distinct efforts for succession planning. High net worth individuals worrying about family splits and splintering ventures led to the creation of family trusts. Wealth management companies, including banks promote such trusts and offer to manage the funds. In addition, fears of the government introducing estate duty in India led to the formation of family trusts. As is widely known, family members forming private trusts has become a pivotal tool in succession planning.

Taxation of trusts has always remained a complex exercise, as the laws and related jurisprudence have not fully evolved in various aspects; for example, taxation of receipts of any sum of money or immovable property or other specified properties by family trusts for inadequate or nil consideration where beneficiaries and settlors are eligible relatives. However, prior to 1 February, 2017, it was technically possible to take a position that provisions of deemed income are not applicable for receipts of such amounts. This helped in achieving tax neutrality in the contribution of family assets during settlement of trusts for succession planning.

India levied the estate duty tax between 1953 and 1985, which was later scrapped by V. P. Singh. Inheritance tax had not been billed since, until February 1, 2017. The Budget 2017, as presented on 1 February, 2017, brought in pseudo inheritance tax, raining on the parade of all family business houses in their succession planning. The bill made important changes to tax benefits enjoyed by private trusts, effectively blowing away the tax shelter used traditionally to pass on wealth and property to heirs.

Effective from 1 April, private trusts will have to pay tax on dividend income from shares. Further, transfer of assets (shares, property, gold and paintings, among others), either without consideration, or after inadequate consideration to these trusts will also become taxable in hands of the trust, post 31 March, 2017.

Corporate India is already scrambling to come to grips with the various changes in the tax regime. Several promoters have ordered their lawyers and financial advisers to re-work plans to tweak their family holdings to beat the 1 April deadline. Some business owners have also put their corporate restructuring plans on hold, pending the passage of the Finance Bill, 2017, hoping for some relaxation.

However, after all the brouhaha by big corporate houses, the government was forced to reconsider the hardship imposed on taxation of family trusts.

Maybe the excessive limelight on Yogi Adityanath took away the deserved deliberation and debates in media on the amendments passed in Lok Sabha in the Finance Bill, 2017. While some of the provisions presented therein felt bulldozed on taxpayers, one amendment in proposed section 56(2)(x) certainly came off as a relief to the affluent in the country.

An amendment to the Finance Bill, approved by Parliament on 23 March, 2017, exempts private trusts from taxes that could be imposed on deemed income arising upon receiving any property or otherwise from an individual, provided the trust is created or established solely for the benefit of relative of the individual.

Families that have dealt with succession planning issues structurally have typically ensured the survival and sustainability of their business and wealth through generations. Thus, promoters that are genuinely inclined to adopt succession planning to safeguard the legacy of their businesses would be thanking Mr Arun Jaitley for this welcome change.

Furthermore, now that the business houses have been shaken off their status quo in the taxation of family trusts, even momentarily, the implementation of succession planning would no longer remain mere flexibility but become a necessity!

With inputs from Saurabh Mehta, Associate Director and Pragya Jha, Assistant Manager - M&A Tax, PwC

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Alok Saraf

Alok Saraf is a Partner with PwC India’s Mergers & Acquisitions Tax team and leads its Private Equity group. He has over 15 years’ experience in M&A tax

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