Startups With Slashed Valuation, Asked to Pay More in Tax

As the year comes to an end, there is little for some Indian startups to cheer about. The Income Tax Dept has issued tax notices to about 100 startups, who have witnessed a marked round valuation, on the grounds that the first premium received by these companies was more than their fair market value (FMV).

Startups that have received the notice have to shell out 33% tax on the premium by March 31 or challenge the order in the court of law, according to a report in The Economic Times.

Contrary to what many believe, this is not a new law, as the Section 56 of the Income Tax Act confers tax officials the power to levy taxes on excess consideration received, more than the fair value of the shares issued for any tax to be levied.

“Any consideration received by a company (startup) from a resident, against issue of shares, exceeds the fair market value of such shares, such excess consideration is taxable in the hands of the startup, as an income,” Section 56 (2) (vii) (b) of the Income Tax Act says.

While startup founders fear, the move will impact their morale, who are already facing challenges with scaling up businesses, tax officials argue that they are merely disputing the valuations of these companies, who were paid more than their fair value, on which tax needs to be paid.

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