Taxation of Non-compete fees in case of Profession

By | March 6, 2016

Finance Bill 2016

Taxation of Non-compete fees and exclusivity rights in case of Profession

The existing provision of clause (va) of section 28 of the Act includes within the scope of “profit and gains of business or profession” any sum received or receivable in cash or in kind under an agreement for not carrying out activity in relation to any business; or not to share any know how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for  services and is chargeable to tax as business income. Further, the provisions clarify that receipts for transfer of right to
manufacture, produce or process any article or thing or right to carry on any business, which are chargeable to tax under the head “Capital gains”, would not be taxable as profits and gains of business or profession.

Under section 45 of the Act, any capital receipt arising out of transfer of any business or commercial rights is taxable under the head “Capital gains”. The amount of “Capital gains” is computed according to section 48 of the Act. For this purpose, ‘cost of acquisition’ and ‘cost of improvement’ are defined under section 55. However, non-compete fee received/receivable in relation to carrying out of profession are not covered under these provisions.

It is proposed to amend clause (va) of section 28 of the Act to bring the non-compete fee received/receivable( which are recurring in nature) in relation to not carrying out any profession, within the scope of section 28 of the Act i.e. the charging section of profits and gains of business or profession. Further, it is also proposed to amend the proviso to clarify that receipts for transfer of right to carry on any profession, which are chargeable to tax under the head “Capital gains”, would not be taxable as profits and gains of business or profession. It is also proposed to amend section 55 so as to provide that the ‘cost of acquisition’ and ‘cost of improvement’ for working out “Capital gains” on capital receipts arising out of transfer of right to carry on any profession shall also be taken as ‘nil’

These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years.

[Clause 12 & 33 of Finance Bill 2016]

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