Shweta K.
The intricate fabric of India’s diverse cultural and social traditions best comes alive in art, which reveals its unending, fascinating stories. In fact, art in all its avatars has for centuries now been an undeniable cornerstone of our rich and varied cultural heritage. Over the years, art has captivated the interest of innumerable visionaries. This not just includes individuals, but today, also the Indian corporate sector, which has turned a keen eye to a phenomenon that juggles both aesthetic engagement and investment opportunities. Although initially, this love for art may have started as a passion, eventually, it has been able to turn the dynamics around by becoming an integral part of art collectors’ wealth. Over the last few years, pandemic or no pandemic, art valuations have witnessed new highs. Today, this industry stands tall as a viable alternative avenue for investment in the country.
Globalization has also improved the visibility of Indian artworks in the international market, which has further perpetuated cross-border dealings and the movement of art. The growing awareness has drawn the corporate sector to invest in art and support the cause of protecting artistic heritage through various initiatives, often as a part of their enthusiastic corporate social responsibility (CSR) projects. Aside from the private sector, when one also explores individual wealth, it is apparent that art collections now form a significant part of family inheritance that passes down over generations. However, in all such transactions, proper documentation is essential to support the compilation of the collection. Documentation also helps in establishing the authenticity and provenance of building blocks for the collections. This necessitates a different approach towards the art sector and makes it imperative to develop an understanding of taxes, accounting and the exchange control frameworks. These factors deeply impact the legal acquisition, holding, succession and transfer of artworks.
The framework in India
Given the increased traction in the art industry, the Indian government has fairly recently introduced various tax and regulatory measures to govern this sector. While the Direct Tax Code proposes wealth tax on art, the Wealth Tax Law was abolished in the Union Budget of 2016-17. Declaration of art holdings has also been recently introduced in income tax returns, triggering compliance even for passive art holders. All gifts of art or art acquisitions for inadequate consideration attract tax. Gains on art have been brought under the ambit of capital gains, besides the levy of Value Added Tax (VAT) on the sale. With the introduction of the Goods and Services Tax (GST), in addition to the tax implications on the purchase and sale of art, it is important to comply with the various requirements. These include multiple registrations, valuation and documentation with respect to the movement of artworks. A common issue in many of these legislations deals with the valuation of art. The absence of a ready reckoner till recently, and a limited consensus on the subject across key stakeholders still may result in significant anomalies.
Tax and exchange control considerations for an art collection
Amongst the few entities in India addressing this topic, Ernst & Young (EY) and Aura Art Development Pvt Ltd have sought to demystify “the science behind valuing art”, in a publication released in December 2017. It summarizes key tax and exchange control compliance requirements, as well as highlights the issues that need further consideration, for those who seek to build art collections of inimitable worth and beauty.
Acquisition and holding of artwork
When it comes to the acquisition of art, there are some key considerations to be taken into account. This activity could be split into domestic and overseas categories, depending on the location where one acquires the works. As far as domestic acquisition of art goes, the GST levy is not to be ignored, and neither is the EWB/Eway Bill or electronic bill, which tracks the goods in transit. Further, the credit evaluation of the entities involved is another basic factor to be acknowledged. The valuation of the artwork aside, there are several compliances that need to be adhered to.
Similarly, when it comes to overseas acquisition, one has to start with overseas tax law compliances. Buyers and sellers both cannot forget the levy of import duty and valuation. And then, there are various exchange control regulations that need to be studied, besides ensuring that a tax-efficient investment structure is in place. It is to be noted that tax reporting of art assets is essential. Individuals or HUFS (Hindu Undivided Family) with a total income of over INR 5 million are required to disclose in their return of income the cost data of various classes of assets, including archaeological collections, drawings, paintings, sculptures or any work of art.
On a similar note, the concept of taxation on fair value states that the receipt or acquisition of property in the nature of an archaeological collection, drawing, painting or any work of art, without or for any inadequate considerations, shall trigger taxation in the hands of the recipient at fair market value. Other aspects that need to be considered in such transactions are tax withholding, characterizations of art assets, amortization or depreciation, and the treatment of art-related costs.
Movement of artwork
Art travels far and wide — and rapidly — as the world shrinks further and further in the 21st century. Amongst the many aspects that art collectors must pay attention to are the processes involved in the movement of this precious cargo. For instance, the movement of artwork within India necessitates the evaluation of GST impact as well as the implication on stock transfer. There may also be movement of artwork with its origination in India, or terminating here. This requires a watch on complications with exchange control regulations. For example, one must note that under the liberalized remittance scheme, an individual can freely remit up to USD 250,000 overseas per financial year, which can be used for purchasing art pieces overseas that are subject to the extant foreign trade policy.
However, these artworks need to be physically imported into India within six months from the date of remittance. The entities involved in this transaction also need to consider the evaluation of transfer pricing norms and the levy of import or customs duty. Further of importance is the reporting of foreign assets and direct tax implications in India, the possible regulatory restrictions on the export of a specified artwork, and the change in residency status of the artwork’s owner, which carries tax and exchange control implications. Other than these, off-shore movement of artwork is another possibility. This requires compliance with the laws of overseas jurisdictions and the obvious evaluation of transfer pricing norms.
Understanding the monetization of artwork
Art can be subject to sale, as much as it could be a gift or barter when it comes to building collections. There could also be a loan of artwork, or a lease agreement between two entities. Other scenarios in which artwork is shared include a reverse mortgage or a license of reproduction. That being said, experts continue to emphasize that attention be paid to exchange control norms and valuation norms. As per the latter, the fair market value of artwork shall be the price it would fetch if sold in the open market on the valuation date. Such valuation rules provide stringent criteria for qualifying as registered valuers. Other aspects to be considered are GST implications, stamp duty, the structuring of the transaction and direct tax for both the recipient and the seller. The transfer of the artwork triggers capital gain taxation or business income taxation in the hands of the seller, depending on whether the art asset is held as stock-in-trade or an investment.
Miscellaneous factors and considerations
Artwork is often a product of succession. If this art is being passed down, an understanding of the inheritance or trust structure, the structuring of the endowment of the artwork, and the taxability in the hands of the successor are needed (the latter bringing with it a trigger of fair value taxation and stamp duty implications). In other scenarios, art falls under the category of a tax incentive, for which some planning would be the smart way to move. Tax incentives could be evaluated for new-age startups, while overall, incentives under GST and the Foreign Trade Policy, including duty waiver on the import of artwork of national importance, are of interest to study. Art owners may also explore incentives for setting up corporate museums or contributing to national museums. They may liaise/represent government/regulatory authorities from state incentives. For companies, embarking on this process also involves the structuring of CSR activities. Another way in which artwork is transacted that requires comprehension of money movements is the pooling of artwork. This could lead to taxation as an association of persons (AOP) or body of individuals (BOI). Typically in such a situation, there will subsequently be an evaluation of GST levied on joint ownership, the feasibility of an investment vehicle, as well as structuring of art funds.
