The Income-Tax department is now cracking its whip on startups who are under suspicion for artificially inflating their valuation during the boom years of 2014 and 2015 and using it for laundering money and avoid paying taxes.
A report in the Economic Times says officials have questioned tax consultants and accountants on valuation certificates given out to startups and are questioning the sanctity of the fair value estimates of startups.
The department believes that in cases where excessive valuation was given to startups and money raised based on it, such investments should be considered taxable income.
The ET quoted a tax expert as saying that a reading of a provision in the tax laws suggests that premium charged on sale of securities over and above the fair value is subject to tax.
Consequently, tax officials have reportedly sent summons to various consultants questioning the methodology used to value many startups during the boom period. The department is asking the startups to pay 30 percent tax on money raised by selling equity.
The exercise may be fraught with danger as valuations are inherently subjective in nature, say experts.
How is fair value of a company assessed?
Valuation experts use several methods to estimate fair value of companies, including discounted cash flow based on forecasts of future revenue and profitability, peer analysis and economic situation among others.
The exercise, however, is prone to subjectivity. For instance, several startups got high valuations in 2014 and 2015 basis projections of high growth that never came through.
What are the startups saying on this?
“We already have an uphill battle and we try our best to be compliant. Even after ensuring compliance, if the government still sends us unnecessary notices, it not only costs us lawyer fees but also the time of promoters, taking our focus away from running the core business,” Sourabh Deorah, CEO of startup Advantage Club, told ET.