Govt Expands The Net By Plugging LoopholeNon-Compliance To Attract Stiff Penalties
Professionals obtaining any sum of money under a non-compete agreement will now be subject to tax with the government having plugged a loophole in the Budget.
Once non-compete agreements were largely restricted to the manufacturing arena.For instance, an outgoing employee would have to sign on the dotted line that he would not share knowhow or a patent that he had helped develop during his employment. Or if he was an inventor, he could be debarred under the non-compete agreement from starting a similar line of business for a certain period. The money received under such non-compete agreements was duly taxed.
“There was no specific provisions to cover professionals who could argue that the sum of money received by hem under a non-compete agreement was not taxable,“ says Gautam Nayak, tax part ner, CNK & Associates.
Now a wide gamut of pro essionals -such as those in he legal, medical, enginee ring or architectural profes sion, or engaged in accoun ancy , consultancy and inte rior decoration, to name a few -have no escape from paying their tax dues when they receive money under a non-compete agreement.
The nature of the tax will be based on the nuances of the agreement. The money recei ved could be taxed either as a capital gain or as income from business or profession. Nayak illustrates: “If a managing partner in a consultancy transfers the right to carry on the firm in its existing name, the sum of money received by him would be a capital gain, subject to a lower rate of tax, assuming the managing partner falls in a higher tax bracket. But if the managing partner decides not to set up a competing consultancy business for a certain period of time, say three years, then the sum of money recei ved under the non-compete agreement will be treated as income from business or profession and taxed at the applicab le income tax rates.“
The Times of India, New Delhi, 02 March 2016
Professionals obtaining any sum of money under a non-compete agreement will now be subject to tax with the government having plugged a loophole in the Budget.
Once non-compete agreements were largely restricted to the manufacturing arena.For instance, an outgoing employee would have to sign on the dotted line that he would not share knowhow or a patent that he had helped develop during his employment. Or if he was an inventor, he could be debarred under the non-compete agreement from starting a similar line of business for a certain period. The money received under such non-compete agreements was duly taxed.
“There was no specific provisions to cover professionals who could argue that the sum of money received by hem under a non-compete agreement was not taxable,“ says Gautam Nayak, tax part ner, CNK & Associates.
Now a wide gamut of pro essionals -such as those in he legal, medical, enginee ring or architectural profes sion, or engaged in accoun ancy , consultancy and inte rior decoration, to name a few -have no escape from paying their tax dues when they receive money under a non-compete agreement.
The nature of the tax will be based on the nuances of the agreement. The money recei ved could be taxed either as a capital gain or as income from business or profession. Nayak illustrates: “If a managing partner in a consultancy transfers the right to carry on the firm in its existing name, the sum of money received by him would be a capital gain, subject to a lower rate of tax, assuming the managing partner falls in a higher tax bracket. But if the managing partner decides not to set up a competing consultancy business for a certain period of time, say three years, then the sum of money recei ved under the non-compete agreement will be treated as income from business or profession and taxed at the applicab le income tax rates.“
The Times of India, New Delhi, 02 March 2016
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