CBDT and DIPP need to collaborate
Income tax department is planning to issue notices for companies downsizing their valuation based on the principle that the difference in the premium between the downsized round and last round should be taxed under section 56 considering the premium difference as income. I am sure the investors and the companies have sufficient reasons to downsize their valuation owing to decrease in profitability or growth.
However, these notices would lead to long drawn legal battles between the department and the company and thereby increasing their legal cost.
The very reason for downsizing the valuation would be due to lack of expected growth, which would invariably result in cash crunch. To add to this scenario, legal issues arising out of down-rounds triggering the aforesaid clause, would lead to unnecessary burden on the startup and reduce its management bandwidth.
In a worst-case scenario, if the company fails to justify the valuation to the income tax officer, the excess premium shall be taxed at 30 percent. The company can file for an appeal before the Appellate authority for withdrawing the order passed by the income tax officer. However, the company is bound to deposit the tax before filing the appeal. This will hamper the working capital operations of the company to a great extent, even crippling the future of the company.
The investment climate in India reached an all-time high in 2015 and started falling in 2016. As per the income tax laws, the income tax officer can issue notices six months from the end of the relevant of Assessment Year, for example, for FY 2014-15 and 2015-16, the income tax notices should be issued before September 2016 and September 2017, respectively.
With the current investment climate with multiple down rounds happening and investors taking a hair-cut on their investments, there is a strong possibility of many startups receiving IT notices relevant to such fundraises which were based on frothy valuations. Documentation and process followed with regard to investments received needs to be maintained to ensure readiness in case such cases need to be tackled. more
However, these notices would lead to long drawn legal battles between the department and the company and thereby increasing their legal cost.
The very reason for downsizing the valuation would be due to lack of expected growth, which would invariably result in cash crunch. To add to this scenario, legal issues arising out of down-rounds triggering the aforesaid clause, would lead to unnecessary burden on the startup and reduce its management bandwidth.
In a worst-case scenario, if the company fails to justify the valuation to the income tax officer, the excess premium shall be taxed at 30 percent. The company can file for an appeal before the Appellate authority for withdrawing the order passed by the income tax officer. However, the company is bound to deposit the tax before filing the appeal. This will hamper the working capital operations of the company to a great extent, even crippling the future of the company.
The investment climate in India reached an all-time high in 2015 and started falling in 2016. As per the income tax laws, the income tax officer can issue notices six months from the end of the relevant of Assessment Year, for example, for FY 2014-15 and 2015-16, the income tax notices should be issued before September 2016 and September 2017, respectively.
With the current investment climate with multiple down rounds happening and investors taking a hair-cut on their investments, there is a strong possibility of many startups receiving IT notices relevant to such fundraises which were based on frothy valuations. Documentation and process followed with regard to investments received needs to be maintained to ensure readiness in case such cases need to be tackled. more
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I only wish that these notices are given online and reply accepted online. The decision after going through the replies must be well reasoned. more
Aug 07
Every Shopkeeper must file Sales Tax return whether ST is applicable on him or not with a copy of Stock Register more
Jul 30
Volunteer organisations / TRUSTS may be involved to collect IT Returns from PAN Card holders on commission basis. more
Jul 30
This gives another handle for increase in corruption by the already one of the most corrupt departments. Also the provision that the penalty must be paid before appeal is draconian. more
Jul 30
