Anti-abuse Provisions Should Not Be Used in Receipt of Capital from Credible Investors: Experts

The tax department has issued show-cause notices to several startups in connection with the share premium money received by them a couple of years ago, says Punit Shah, Partner, Dhruva Advisors.

“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),” Shah said.

He added that in almost all such cases, the amounts are received by 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.

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," Shah said.

“These actions of the tax department could be detrimental to the growth of startup ecosystem and FDI flows in the country,” he added.