Saturday, December 24, 2016

No Tax Issues for Startups Charging Premium on Issue of Shares !


Funding for starstups in India is now  unshackled from the tax issues that other private companeis face . Earlier this blog had published Relaxation to Startups on Sweet Equity . Now there is another good news on fuund raising front . The fact that the startups gets funding in the begining more on a vision of a business , rather than on actual result . Most of the startups in the begining incur losses  and even from the planning perspective , their brak even years are much later set. So , if in the begining you see the worth of shares of company minus the future or vision of growth in future , the Fair Market Value of each share will be quite low and not even near to the price per share on which the Investors have brought in fundd. This scenario however was raising an income tax issue .


Section 56(2)(viib) & Share Issue by A Startups

Section 56(2)(viib) was brought in the statute book to fight the menace of tax evasion by creating bogus companies simply to launder black money though issue of shares of private companies. The law is that if a private company ( closely held company ) issues shares and receives payment for shares which is more than Fair Market Value (FMV ) of the shares , in such cases , the difference between the issued prices of share and its FMV shall be added as income from other sources . 

Read the provision :

(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:Provided that this clause shall not apply where the consideration for issue of shares is received—(i) by a venture capital undertaking from a venture capital company or a venture capital fund; or(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

This clause was creating the problem for new startups and a bottleneck for raising the fund 


What has happened Now ? 

The government was approached to remove such a difficulties So , the as per Clause (ii) under proviso that empowered it to notify any person on whom section 56(2)(viib) can not apply. The notifcation dated 14/06/2016 ( I do not why this notifcation was hidden and not in public domain for so long )  by which the startups as defined vide GSR I dat 17,02,2016 , will be out of the purview of the section 56(2)(viib) .

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