The government has decided to relieve startups on the tax man’s radar for raising capital over the fair value of their shares till a panel decides on the issue.
Startups that were receiving a slew of tax notices off late have reason to be relieved. The Central Board of Direct Taxes (CBDT) has stated that no tax demands will be raised for such firms till an expert panel decides on the taxation of startups. The panel is expected to comprise members from leading institutions like IITs and IIMs.
CBDT said in a statement that it “recognizes that startups are going to bring a lot of innovation to the country and, therefore, have to be supported in every possible manner.”
The issue hails from an anti-abuse provision in the Income Tax Act of 2012, which was done to prevent politicians taking bribes in the form of share premiums in unlisted companies that they had set up. Under Section 56(2)(viib) of the Income Tax Act, share premium above the fair valuation of shares is classified as “other income” and is taxable.
But in the case of genuine startups who are getting a premium based on the worth of their ideas, the provision acts as an unnecessary barrier. Tax officials value them on net asset value as opposed to companies that are valued on estimates of future earnings.
The decision to relieve startups for now was taken at a meeting chaired by Ajay Bhushan Pandey, Secretary (Revenue), Ramesh Abhishek, Chairman, Department of Industrial Policy & Promotion and Sushil Chandra, Chairman, CBDT. While the government had earlier provided some relaxation including exemption from share premium tax to startups notified by the government and to investments made by venture capital funds, this has been deemed inadequate.
In May, the benefit was extended to angel investors or high net worth individuals. But this is conditional and only applicable to start-ups with paid-up capital and share premium of up to Rs 10 crore after the issue. Moreover, the angel investor should have an average income of Rs 25 lakh in the past three years or a net worth of Rs 2 crore for the previous fiscal year.