Investing in art? Make sure your papers are in order to avoid tax problems

The paperwork must show how the artwork was procured and that valuation was correct when it was bought; art collectors also need to insulate their beneficiaries from tax troubles in the future

The Indian visual art industry is nascent compared to developed markets such as the US, the UK and China, even as high net-worth individuals (HNIs) are increasingly looking at including works of art in their investment portfolios. The huge interest shown by India’s wealthy population has prompted London-based auction house Sotheby's to host its inaugural sale in Mumbai this December. This is the first time the auction house will be hosting a sale in the country after its first attempt three decades ago.

A few HNIs are also using artwork for portfolio diversification. Some wealthy individuals buy their art overseas by remitting money abroad under the liberalised remittance scheme, and keep it with the galleries in the same country. This helps them maintain an asset in another currency that has the potential of capital appreciation.

As more individuals look at collecting and investing in visual art, the income-tax department has increased its scrutiny as well. “It’s easier to evade taxes using artwork. It’s easier to determine the valuations of other assets such as property, gold, and financial instruments, as there are standard procedures laid down. Valuation of art is subjective. The department is, therefore, more alert,” says Gopal Bohra, Partner, NA Shah Associates.

Individuals collecting art need to ensure that they have their paperwork in place to show how the artwork was procured and that the valuation was correct when it was bought. Those bequeathing their collection need to take measures to insulate their beneficiaries from tax troubles in the future.

Register for GST: Since the introduction of the Goods and Services Tax, artists, galleries and buyers have complained that the new system will hamper the sale of art. In some cases, it makes buying art more expensive than before. Some provisions require compliances that artists, buyers and galleries feel are unwanted and unreasonable.

Under the new taxation structure, artwork, including, paintings, drawings and pastels, original engravings, original sculptures and antiquities more than 100 years old, fall under the 12 per cent tax bracket, rendering them more expensive than they were prior to GST implementation. “Earlier, selling of artwork attracted excise duty in most cases. Many states had exempted sale of artwork from excise,” says Utkarsh Sanghvi, tax partner, EY India.

The movement of art outside the artists’ or collectors’ state also has the notion of sale. If someone is sending artwork from Mumbai to Delhi for an exhibition, the person has to pay tax on the declared value at the point of origin. Sanghvi suggests that the buyer also registers for GST. If an individual sells artwork worth Rs 2 million in a financial year, he is now liable to pay GST. Registering for GST will also help the buyer to claim the credit if he sells the painting further.

Buy from registered dealers: In India, a significant number of sales are conducted privately. “Discretion has conventionally been one of the art industry’s keystones,” says a report by KPMG and Ficci titled ‘Visual Arts Industry in India: Painting the Future’. It states that While there are a number of noted art galleries and auction houses that account for a majority of formal art sales in India, there exist numerous art dealers and galleries across the country whose sales are not accounted for. Sales data from the such dealers lacks transparency. “This is largely because a majority of such art dealers and galleries across India are small establishments and sole traders without employees, sales conducted by whom go unreported and untaxed,” says the report. Trying to save tax when buying from these sources can prove costly in the future.

Tax experts say that buyers should always purchase from registered art dealers. They should completely avoid one-on-one transactions. “The invoice mentions details about the painting, such as its size and dimensions, colour combinations and the type of colour used. In a few cases, we have seen that the title in the invoice doesn’t match with the one mentioned on the invoice. If there’s a tax query on the painting in the future, the sleuths can dispute the genuineness of the receipt as the titles are different,” says Bohra. Also, use banking route for the payment so that you have enough documentation and proof.

Artwork received as a gift from abroad: If a person receives artwork as a gift, the taxation is the same as that of other gifts. If it is from a close relative, there will be no tax. If a distant relative gifts artwork, the receiver needs to get the valuation done from an authorised valuer and pay the applicable tax. Things can get a little complicated if a close relative abroad gifts artwork to someone in India.

The receiver will need to first pay the customs and Integrated Goods and Services Tax on the artwork to import it in India. “In such cases, the receiver is better off keeping extra paperwork that establishes that the gift is genuinely from a close relative and the valuation,” says Indruj Rai, associate partner, Khaitan & Co. Ask the sender to give a copy of the invoice that bears the relative’s name. The relative can also give a declaration about the gift. In such cases, the burden of proving that the gift is genuinely from a close relative would lie on the taxpayer. The tax department would want to ensure that the artwork is not used to avoid taxes. The receiver can produce the invoice, customs duty receipts and declaration in case of any query raised by the income tax department.

Make inheritance of art worry-free: Bequeathing artwork bought decades back and for which the owner doesn’t have invoices or bank statements can create problems for the beneficiary. “When bequeathing workd of art, describe them in detail in the Will. Include details such as title, year in which the artwork was made, artist’s name, and describe the piece in a few sentences,” Rai.

Those earning Rs 5 million or more need to declare specified assets, including art, when filing income tax returns. Mentioning all your assets including artworks will keep you on the right side of the law.