Section 263 Of Income Tax Act Being Used To Send Notices To Startup Founders Reporting High Valuations

The Indian income tax department has started questioning the valuation criteria of startups in the country. Several registered startups have received notices from the Income Tax department, under the Income Tax Act’s Section 263, to seek more clarity on the reasons behind their valuations.

Mahendra Swarup, the chairperson of the industry body Startup Association of India (SAI), has confirmed the development, highlighting that few of its member companies have received such notices. The Income-tax department had issued such notices to about 200 entities back in 2017 as well. The department had then highlighted that the funding received over and above the fair market value of a startup must be considered as its income and not capital.

“The powers under section 263 of the Income Tax Act are to be invoked on the satisfaction of twin conditions of the order being both erroneous and prejudicial to the interests of the revenue,” Swarup told ET.

He further added that the income tax department’s decision to revisit startup valuation is “negating the benefits” accorded to the Department for Promotion of Industry and Internal Trade (DPIIT)-registered startups and investors. The organisation now plans to take this issue up with the Central Board of Direct Taxes (CBDT) “as this brings uncertainty in the startup ecosystem”.

Currently, DPIIT-registered startups are spared taxes on the amount received by the way of a premium over the fair market value (FMV). Unlisted companies still have to pay taxes on the premium. The media report noted that startups currently arrive at a FMV, following the methods laid down by DPIIT itself, but tax officials can question the parameters and assumptions in calculating the final valuation.

Under the Startup India Action Plan, a registered entity may apply for a tax exemption under section 80 IAC of the Income Tax Act. After the clearance, a startup can avail of tax holiday for five consecutive financial years, out of its first ten years of incorporation. Post getting recognition, a startup is also eligible to apply for an Angel Tax Exemption if the aggregate amount of paid up share capital and share premium of the entity after the proposed issue of share does not exceed INR 25 Crore.

Startups can file a self-declaration with DPIIT stating they have not invested in specified asset classes. The department then transmits this information to the CBDT, which scrutinises it further. The tax officials hold the authority to deny tax exemption under Section 56 of the Income Tax Act, in case a startup is found to have given false declaration or violated conditions by investing in land.

The post Section 263 Of Income Tax Act Being Used To Send Notices To Startup Founders Reporting High Valuations appeared first on Inc42 Media.


Post a Comment

0 Comments