DPIIT Brings Startup Taxation Issue to FinMin Post the amendments proposed in the Finance Bill, concerns have been raised over the calculation method of fair market value (FMV) under two distinct laws.

By Sujata Sangwan

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The Department for Promotion of Industry and Internal Trade (DPIIT) is said to have brought up the taxation issue of Indian startups with the finance ministry in the midst of the ongoing debate over angel tax.

A month ago, it was reported that DPIIT had privately raised the concerns of the Indian startups on the angel tax with the Department of Revenue and Economic Affairs.

Post the amendments proposed in the Finance Bill, concerns have been raised over the calculation method of fair market value (FMV) under two distinct laws. The Finance Act, 2023, has amended Section 56(2)(viib) of the I-T Act, thereby bringing overseas investment in unlisted closely held companies, except DPIIT-recognised startups, under the tax net.

It is anticipated that the Income Tax administration will soon release some draft regulations that will specify the class of investors and norms of valuation of foreign investment in unlisted companies.

The I-T Act and FEMA establish distinct procedures for computing the FMV of shares of unlisted companies, necessitating the revision of valuation regulations.

What do investors say?

According to Umesh Uttamchandani, Co-founder of DevX Venture Fund, Section 56(2), which was added to the Finance Act to stop the flow of unaccounted money, seems to have a negative impact on the ecosystem as a whole. Uttamchandani stated that the proposed law would most certainly deter foreign investors to deploy capital and at the same time would give 'food for thought' to startups and relocate/restructure in other tax-friendly nations.

"Considering the current funding winter, investors as a group have been pressing for a progressive policy and environment. The act needs to define the calculation of fair market value in such a manner that it becomes a win-win situation for the startup ecosystem and the goal of the government to widen the tax base is met," Uttamchandani emphasised.

Dr Somdutta Singh, Founder and CEO of a cross-border e-commerce accelerator Assiduus Global shared that it's time for the government to empower businesses by allowing valuations based on any globally accepted methodology. "Aligning the I-T Act with FEMA valuation guidelines under sub-rule 2 of 11UA will unlock a world of possibilities. By embracing internationally accepted valuation methodologies, we pave the way for a globally harmonized approach that stimulates economic growth and collaboration."

Meanwhile, angel investor Prateek Toshniwal argued that data-driven analysis is essential when considering the potential impact of the amended Section 56(2)(viib) of the Income Tax Act on new investments. "An examination of historical investment trends reveals that a balanced and reasonable tax regime encourages more angel investments in startups. This, in turn, drives innovation and job creation, contributing to overall economic development.

"I strongly believe that the government should prioritize addressing the concerns of angel investors and stakeholders. By implementing a data-driven approach and collaborating with industry experts, we can create a robust framework that fosters entrepreneurship, attracts investments, and propels India as a leading startup-friendly nation," Toshniwal highlighted.

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Sujata is an engineering graduate and has done her Post Graduation in Human Resource Management. She has a deep interest in startups, venture capitalists & technology. She can be reached at sujata@entrepreneurindia.com.

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