As valuations plunge, startups asked to shell out more in tax
Startups that have seen marked down valuations in subsequent funding rounds have been ordered to pay tax on the grounds that the first round of investment was made at a premium.
The Income Tax department has issued such orders or adjustments in about 100 cases across India between November 30 and December 15, according to people in the know.
Startups that have received the tax demand will have to cough up 33% tax on the premium by March 31 or challenge the order in the court of law. The tax demand is made for the assessment year 2013-14 and 2014-15 in almost all the cases. But, according to industry experts, most startups won t take legal recourse. They will choose to focus on their business than going into litigation.”
“In most of the cases, the valuation in the angel or seed round runs ahead of fundamentals and is based on the longterm promise a startup presents, which, in the majority of the cases, does not materialise. Tax officers are disputing the valuations by either comparing the projections/assumptions done during the valuation round with the actual performance later (which in many cases is below the projections) or taking the valuation of the subsequent round as the base to prove that the valuation in question is unreasonable.
These firms are then issued notices under the Section 56(2)(viib) of the Income-tax Act, 1961,” said Amit Maheshwari, Partner, Ashok Maheshwary & Associates.
“Any consideration received by a company (startup) from a resident against the issue of shares exceeds the fair market value of such shares, such excess consideration is taxable in the hands of the startup as income” reads the Section 56(2)(viib) of the Income-tax Act, 1961.