sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing | GST - Goods and Services Tax
Latest Expert Exchange
ę News Headlines »
 5 mistakes you should avoid while filing income tax returnsa
 Income tax exemption, relief for farmers? 5 expectations from interim budget 2019
 PCIT vs. Perfect Circle India Pvt. Ltd (Bombay High Court)
 The National Company Law Tribunal (Amendment) Rules, 2019 notified
 Get income tax refund in one day from 2020
 Your ITR filing will soon get processed in just one day
 Here's how These new tax laws allow you to save more tax in FY2018-19
 Income tax exemption limit may be doubled to Rs 5 lakh in interim budget
 How to use home loan and rental outgo to save income tax
 Income Tax Department Income Tax Return Statistics Assessment Year 2017-18
 Section 80C limit: Should you use only life insurance to save taxes?

Decoding the tax on start-up valuation premium
June, 03rd 2016

The income tax department is in discussions to levy tax on start-ups that have seen a fall in valuations on the premise that the premium received by the company was more that its fair value. The news was first reported by The Economic Times on Thursday.

Is this a new tax?

This tax has been around for the last four to five years and not just for start-ups. “This is not a new tax, there is no change in the law and it doesn’t affect start-ups that have raised money from foreign funds (Tiger Global, Softbank, Accel among others). This leaves a very small fraction of Indian start-ups that would have to pay this tax and that too (only) for angel investments because a company that raised funds from a venture capital fund that is registered with Sebi would also be exempted from the tax,” says Sanjay Khan who is part of the legal services team for iSpirt (Indian Software Product Industry Round Table).

That means unicorns such as Flipkart and Zomato that may have seen a fall in valuation have no cause to worry.

How does it work?

When a company is looking for its first round of funding, typically an angel or a seed round, it doesn’t have a proven business model and investments are sometimes on faith or a modelled discounted cash flow. Over a period of six to seven years, the company raises a few more rounds. Then a private equity investor comes on board. The PE investor revalues the company at half the value it was valued at in the angel round. This is when tax dynamics come into play.

Since the company has not issued shares at fair value, it will be taxed 30% on the premium, and this will be done for every round of funding received at a premium with a interest rate of 12% for delayed payments.

The tax is levied because the taxman thinks the premium is actually the company’s income.

“If a company was valued at X and raised $9 million in its previous round, but now with market forces at play its valuation falls by a third to X/3 then it will be taxed on $6 million that is now considered as its income,” says Harish H.V., managing partner Grant Thornton.

“However, this tax has some exemptions. If the company is able to justify that the fall in the valuations is due to external factors ( regulatory change, business changes) it would be exempted from the tax,” says Bijal Ajinkya, partner at Khaitan & Co.

“The Income-tax Rules prescribe the methods of valuation, as well as the date on which the valuation has to be considered. Also, valuation done on a current date cannot be applied to prior year, where such valuation has

Home | About Us | Terms and Conditions | Contact Us
Copyright 2019 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Our Experience

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions