Since 2012, companies are required to pay tax on subscription money received on issuance of shares, where the subscription price is higher than the fair market value (FMV) of the shares, also known as angel tax.
Tax is payable on the differential amount. FMV is to be computed using book value method or the Discounted Free Cash Flow (DCF) method. However, there is no incidence of tax where the money is infused by a non-resident shareholder, venture capital company or venture capital funds.
Most companies prefer to use DCF method since it is based on projections of future income and expense and involves high degree of subjectivity. The tax authorities have been dismissing such valuations by treating the future projections to be baseless and have been taxing companies receiving investments.
Similar orders have been passed against start-ups as well. Recently Department of Industrial Promotion and Policy (DIPP) has revised the norms under which start-ups can claim exemption from angel tax but no relief was granted for on-going cases.
Also, the process for exemption is still seen as onerous and subject to many technical conditionalities. Representations have been made to CBDT and it is expected that relief may be given to on-going cases and a blanket exemption may also be given to the Start-ups, in the upcoming budget.
*Indruj Rai is partner at Khaitan & Co