Tax on Non Compete Fees of Business or Profession
Section 28(va) of Income Tax Act 1961
The existing provision of clause (va) of section 28 of the Income Tax Act 1961 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 were not
covered under these provisions. But Finance Act 2016 amended clause (va) of section 28 of the Act to bring the i.e. the charging section
of profits and gains of business or profession.
Further, Finance Act 2016 also amended 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.
Finance Act 2016 also amended 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’
Date of Applicability of Tax on non Compete Fees in case of Profession
These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years.
Amendment by Finance Act 2016 relating to Tax on Non Compete Fees
Section 12 of finance Act 2016 has Amended section 28 of Income Tax Act 1961
12. In section 28 of the Income-tax Act, in clause (va), with effect from the 1st day of
April, 2017,—
(A) in sub-clause (a), after the words “any business”, the words “or profession”
shall be inserted;
(B) in the proviso, in clause (i), after the words “any business”, the words “or
profession” shall be inserted
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