Tax department has issued show-cause notices to a number of startups in connection with the share premium money received by them
FinTech BizNews Service
Mumbai, March 29, 2024: Tax department has issued show-cause notices to a number of startups in connection with the share premium money received by them a couple of years ago. Punit Shah, Partner, Dhruva Advisors, informs: “Tax department has asked for the details of the nature and the source of the investments, and the credit worthiness of the investors. In order to explain the huge premium received, they have also questioned the valuation and the pricing of the shares issued to the investors by the startups. They have also asked to justify the basis of such valuation (angel tax).”
Almost in all such cases, the monies are received by the startups from domestic or international PE and VC funds of great repute, who have made substantial FDI investments in India over a period of last ten years, states Punit. He explains: “Sections 68/56 are essentially anti-abuse provisions and should be used by the tax department, only in the suspected cases of tax evasion or avoidance and not in such genuine cases of receipt of capital from the credible investors. CBDT in the past has issued instructions to the tax department to not unnecessarily question the share capital/premium infusion in startups and valuation, thereof. These actions of the tax department could be detrimental to the growth of startup ecosystem and FDI flows in the country.”
