India will look into the guidelines for valuing investments made by foreign investors in start-up companies under the so-called “angel tax.”
According to a senior official, the government is looking into the various valuation standards set forth by two different laws, which may result in disagreements and legal action. Under the Foreign Exchange Management Act (FEMA) and the Income Tax Act, these foreign investments are valued in different ways.
India will look into the guidelines for valuing investments made by foreign investors in start-up companies under the so-called “angel tax.”
According to a senior official, the government is looking into the various valuation standards set forth by two different laws, which may result in disagreements and legal action. Under the Foreign Exchange Management Act (FEMA) and the Income Tax Act, these foreign investments are valued in different ways.
“This would be looked into. Rules may also be able to clarify it, the official suggested.
In the budget, the government has suggested changing the angel tax provision, or section 56(2)(viib) of the Income Tax Act.
When an unlisted company issues shares at a price above the fair market value, the angel tax is applied. Taxes on the difference range from 20% to more.
The government now wants to include overseas investors in the angel tax, which up until now only applied to Indian citizens and funds that weren’t registered as alternative investment funds (AIFs).
Due to the fact that several procedures are required by various regulations, experts warned that this would frighten away growth capital and lead to valuation conflicts.
According to Vikas Vasal, national managing partner, tax, Grant Thornton Bharat, “the moot point is that valuation of any corporation is an estimate based on numerous futuristic presumptions, which may or may not materialise.” Therefore, it’s challenging to base any computation system on this premise.
Amit Maheswari, partner at AKM Global, described the situation as odd. “Our foreign exchange laws set a minimal floor (the Fair Market Value for acquiring FDI, however u/s 56(2)(viib) the tax authorities see the FMV as a ceiling above which, if you go, the discrepancy is taxed,” he said.
Maheshwari emphasised that the discounted cash flow method would often be utilised under both FEMA and Income-tax, and thus provided a paradox.
The former finance minister Pranab Mukherjee implemented this clause, referred to as an anti-abuse measure, in 2012. However, after numerous companies received letters, it quickly turned into a significant problem.
Following that, the government provided aid to newly founded businesses that had registered with the Department for Promotion of Industry and Internal Trade (DPIIT).
The government has reaffirmed that businesses registered with the DPIIT will continue to receive assistance; nevertheless, for many unrecognised firms that are heavily backed by foreign sources, the provision may make it even harder for them to secure investment in the current climate.
Given that we are currently experiencing a fundraising winter, Maheshwari warned that the proposed modification could make things considerably worse for cash-strapped companies.
