The Godrej Group is being divided into two separate businesses, one controlled by Adi Godrej and Nadir Godrej and their descendants, and the other controlled by Jamshyd Godrej and Smita Godrej Crishna and their descendants. Lawyers say that the split may not result in any capital gains tax because it is considered a family settlement, and family settlements are exempt from capital gains tax in India. However, there could be tax implications if any companies are involved in transferring assets as part of the agreement
A family arrangement is a tax law provision that allows asset transfers between family members to be exempt from capital gains tax. The Godrej family’s restructuring meets the specific requirements for this tax benefit.Essentially, transferring assets within a valid family arrangement is not considered a taxable sale.
The split:
The Godrej family conglomerate, which has been around for 127 years, is dividing into two separate groups. Each group will control different businesses within the conglomerate.
Who gets what
Adi Godrej and Nadir Godrej faction: This group, likely including their descendants (children, grandchildren etc.), will oversee the publicly traded (listed) companies of the conglomerate. These include well-known names like Godrej Industries, Godrej Properties, Godrej Consumer Products, and others.
Jamshyd Godrej and Smita Crishna faction: This group will take control of Godrej & Boyce, which is an unlisted company. This means its shares are not traded on a stock exchange.
What is a family arrangement?
A family arrangement is a provision in Indian tax law that allows the transfer of assets between close family members without incurring capital gains tax. This can be a significant tax benefit, especially for high-value assets like stocks or property. However, it’s important to understand the rules and limitations to avoid issues with tax authorities.
Why a Family Settlement matters
Normally, dividing up a massive business like the Godjrej split could lead to a hefty tax bill. However, since this is considered a family settlement, it might be exempt from taxes. Here’s why:
A family settlement is an agreement between family members to avoid future disputes, settle existing disagreements, and ensure a fair division of assets while keeping things peaceful within the family.
What is the catch?
While a family settlement sounds like a tax-free way to split the business, there are a few things to keep in mind:
Companies vs. individuals: If companies within the Godrej Group are directly involved in transferring assets as part of the agreement, those transfers might be taxable. The tax would be based on the difference between the current value of the asset and the original investment.
Gifts vs. settlements: While gifts between relatives are generally not taxed, the settlement needs to be genuine and have a valid purpose beyond just tax benefits. If the main reason seems to be avoiding taxes, authorities might challenge it.
Legal precedent:
The Supreme Court judgement in Kale vs Deputy Director of India (1976) is a key precedent for family arrangements like the Godrej split. This case and others have established four principles for such arrangements to be legally valid.
Four key Conditions:
Direct relatives: Only close family members can be involved in a family arrangement. This ensures the transfer of assets stays within the family.
Dispute Resolution (Actual or Potential): The arrangement should aim to resolve existing family disputes about assets or prevent future ones. It promotes harmony and a fair distribution of wealth.
Even without current disputes, the potential for future disagreements (like those seen in cousin succession battles) can justify the arrangement.
Mutual Sacrifice: Each party must give up something. In the Godrej case:
Adi and Nadir relinquish their stakes in the unlisted Godrej & Boyce.
Jamshyd and Smita give up control of most listed entities.
Mutual Recognition of Rights: All family members involved must acknowledge and respect the rights of others under the agreement. This ensures everyone is on the same page and avoids future challenges.
How it Works:
A formal agreement is drawn up between family members outlining the transfer of assets. This document should be clear, documented properly, and ideally stamped by a revenue authority.
The agreement should be based on demonstrably fair and reasonable terms, not solely benefiting one member. This could involve factors like the recipient’s financial needs or contribution to the family business.
Examples:
Parents gifting shares to children: Parents can transfer appreciated shares to their children without triggering capital gains tax. This can be a way to help children build their wealth and potentially reduce the overall family tax burden when the children eventually sell the shares.
Sibling dividing inherited property: Siblings inheriting property can decide to divide it amongst themselves through a family arrangement, avoiding capital gains tax as long as the division is fair.
Limitations and Cautions:
Genuine Transaction: The arrangement must be a genuine transfer of assets, not simply a disguised sale. The purpose should be for family planning or resolving disputes, not solely for tax benefits.
Point to note: The family settlement itself might be tax-exempt, but if companies under the Godrej umbrella are directly involved in transferring shares, those transfers could be taxable for the company itself.
First Published: May 06 2024 | 11:24 AM IST