Valuation Reduced, Now Pay Taxes
If your start up has seen reduction in valuation, you will get punished in one more way now. The investment made by angels in your last round (the difference of value) will now be considered income and the start up will be liable for income taxes. So double whammy for startups. More below.
Recently valuations of many startups have fallen on worries over profitability, growth and an intensely competitive environment. Tax officials believe that startups should be valued on the basis of the last round of investment. Hence as per them, considering the current slashed down valuations as the fair price of the company, the differential amount of the funds raised in earlier rounds at a higher valuation are taxable.
Additionally, this section exempts venture capital funds registered with Securities and Exchange Bureau of India (SEBI). Hence, it will affect only those startups that are funded by angels or funds not registered with SEBI. Consequently, as most of the rounds in these startups are made by angel investors basis faith and confidence in the team with valuations at that point being more a reflection of their faith rather than solely concrete metrics, this will affect these funding rounds as now the angel can be snapped with tax with down rounds becoming a widespread phenomena now.
Despite the industry’s long standing demand that the government should either do away with the angel tax or provide a monetary threshold for exemption for startups, this has not come to fruition. Instead what might come to pass is, angel investors seeing their prior investments which were done at higher valuations in startups, getting taxed under Section 56 of the Income-tax Act. http://economictimes.indiatimes.com/small-biz/policy-trends/move-to-tax-startups-with-declining-valuation-a-form-of-tax-terrorism-perverse/articleshow/52550648.cms more
Recently valuations of many startups have fallen on worries over profitability, growth and an intensely competitive environment. Tax officials believe that startups should be valued on the basis of the last round of investment. Hence as per them, considering the current slashed down valuations as the fair price of the company, the differential amount of the funds raised in earlier rounds at a higher valuation are taxable.
Additionally, this section exempts venture capital funds registered with Securities and Exchange Bureau of India (SEBI). Hence, it will affect only those startups that are funded by angels or funds not registered with SEBI. Consequently, as most of the rounds in these startups are made by angel investors basis faith and confidence in the team with valuations at that point being more a reflection of their faith rather than solely concrete metrics, this will affect these funding rounds as now the angel can be snapped with tax with down rounds becoming a widespread phenomena now.
Despite the industry’s long standing demand that the government should either do away with the angel tax or provide a monetary threshold for exemption for startups, this has not come to fruition. Instead what might come to pass is, angel investors seeing their prior investments which were done at higher valuations in startups, getting taxed under Section 56 of the Income-tax Act. http://economictimes.indiatimes.com/small-biz/policy-trends/move-to-tax-startups-with-declining-valuation-a-form-of-tax-terrorism-perverse/articleshow/52550648.cms more
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Management Consultant Labour Law, Company Liaison work, Compliance, E.S.I.C., P.F. Advisor Office- Chamber No.112, Block-C, Lawyers Chamber, Distt. Court, Gurgaon Phone no. 9350640315, 7503599720, E-Mail :- yadavrk110@yahoo.co.in ___________________________________________________________________________ more
Jun 21
This is very true because different states have different ways of looking at the taxpayer. No central body is looking at the tax on imports to balance international competition. Result, failiure of takeoff of these industries, like our electronics industry. Even government companies like BEL, CIL SCIL had the impact. more
Jun 09
Visit PMO site and write frankly the problem and its solutions. Pm will surely look into. more
Jun 08
