The tax division has requested for particulars of the character and the supply of the investments and the credit score worthiness of the buyers. It has additionally questioned the valuation and pricing of the shares issued to the buyers by the startups, and requested for a justification for the stated valuation.
Consultants stated that these actions of the tax division might be detrimental to the expansion of the startup ecosystem and international direct funding within the nation.
“Virtually in all such instances, the funds acquired by the startups are from reputed buyers, who’ve made substantial FDI investments in India over a number of years,” stated Punit Shah, Companion, Dhruva Advisors.
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Angel tax provisions
“Even international investments, which have been earlier exempt from angel tax, have now come below its ambit below part 56. Contemporary notices below part 68 are actually including to the woes of startups. All this doesn’t augur properly for an ecosystem that’s speculated to be a key job creation engine,” added Nikunj Bubna, CEO of TheWowBox India.
The Finance Act, 2023, introduced investments by non-residents in unlisted Indian corporations at a value greater than the truthful market worth throughout the ambit of angel tax provisions.
Funding valuation
Based on Shah, part 56(2)(viib) or part 68 are primarily anti-abuse provisions and must be utilized by the tax division solely within the suspected instances of tax evasion or avoidance and never in instances the place capital is acquired from credible buyers. Up to now, CBDT has instructed to the tax division to not unnecessarily query the share capital or premium infusion in startups and their valuation, stated Shah.
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To justify the excessive share premium, buyers might must furnish the valuation report for the issuance of securities at a premium and audited financials of the corporate throughout and after the fundraising . Paperwork required to ascertain buyers’ creditworthiness might embody the final three years’ tax returns, financial institution statements, and financials.
To make certain, registered startups that fulfil sure situations as per the notification issued by DPIIT are exempt from angel tax provisions. A CBDT notification has clarified that evaluation in relation to provisions of the angel tax shall not be carried out within the case of such start-ups.
“We’ve got noticed revenue tax officers honouring the notification within the evaluation of eligible instances. The part 68 provisions regarding money credit, nonetheless, function independently of the angel tax provisions,” stated Yashesh Ashar, Companion, Illume Advisory.
He added that offering the related supply of cash belonging to resident buyers (as part of the evaluation) would require the cooperation of the involved buyers.
Part 56(2)(viib) offers with issues associated to “excessive share premium” and “valuation” of investments in startups. Part 68 pertains to the creditworthiness or bonafide of the buyers in such startups.
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