Taxman Shows Up At Startup Valuers’ Doors – The Economic Times
Even as the Centre seeks to pacify India’s startup ecosystem on the so-called angel tax, chartered accountants and industry experts have come under the taxman’s lens for the methodology used in computing the valuation premiums for businesses that often weren’t making any money.
The tax department has started issuing show-cause notices to valuation experts, questioning the premiums several startups fetched during their investments rounds. High valuations — based on the certificates provided by these experts form the basis of the angel tax in businesses that had either failed to make money or show revenue growth in kilter with the projections.
The revenue department is asking startups to pay 30% tax on capital raised by them against the issue of shares in excess of the ‘fair market value’.
Valuation experts, however, say that they merely projected and calculated future growth, using the facts and figures provided by the startups. “Valuations of startups conducted by experts or chartered accountants were based on assumptions and future growth projections provided by the founders, which were achieved or not achieved in actuality,” said Jeenendra Bhandari, partner, MGB, a chartered accountancy firm. “The tax department has started issuing notices on these valuations to the experts or chartered accountants now, and sought explanations on these assumptions and projections, which happen to be the controversy around angel tax.”
A notice issued showed that the tax department sought clarity on the assumptions based on which future cash flows were derived in the valuation report. ET has seen a copy of that notice.
ET spoke to several tax experts who got notices and were questioned.
Most of them were recently questioned about the valuation certificates they issued.
The notices come at a time when the government has claimed that it is dealing with the ghost of angel tax. The tax department has started noting down the statements of valuation experts, and these could be used to strengthen the angel tax demand, say insiders.
According to most people in the know, in the coming weeks the startups would start receiving communication from the tax department, asking them to pay the exact amount computed by the department.
Startup entrepreneurs, on the other hand, claim that the projections were mere assumptions, which is what most businesses are at the earliest stage of their inception.
“Startups by their very nature are founded on assumptions and the business plan/ projections are based on the entrepreneur’s understanding of the business and the opportunity at a point in time. Such assumptions are due to change with time due to internal as well as external factors,” said Vijay Gummandi, cofounder, Autozilla Solutions.
Income-tax officers claim that the scrutiny on startups is mainly due to concerns that black money may have changed hands. “We are investigating if some of these investments were for converting black money (unaccounted money) to white (legal money). Why would someone pay a high amount in investments when the real value is much less?” said a tax officer.