While one could argue that the maiden budget of finance minister Nirmala Sitharaman is devoid of big-bang reforms, it offers much needed certainty to the investor community on a few fronts.
For starters, there is relief from the dreaded ‘angel tax’. Recognised start-ups no longer need to fear the notices from the income tax department invoking Section 56(vii)(b) of the Income Tax Act. This section provides enough ammunition to the tax department to question valuation of start-ups. Any perceived difference between the share allotment price and fair market value was sought to be taxed as ‘income from other sources’.
While investments from venture capital funds were outside the ambit of this ‘angel-tax’, there are examples galore of how innocuous and benign investments into start-ups by friends, family and angels landed them in a soup. The budget has now clarified that valuations of start-ups will not be questioned, provided they file appropriate documentation and returns. This is a welcome move.
An e-verification system is also proposed to be introduced for identifying the investors of the start-ups and their source of funding. This proposal is again in line with the government’s overall thrust on minimising human interface when it comes to tax proceedings.
There is also relief in store for legacy cases. Legacy angel-tax issues are likely to be given a quiet burial as proceedings under old cases cannot be initiated without the prior approval of the supervising officer. Again, this is a welcome move and allows founders to focus on business rather than deal with regulatory issues.
In line with the above proposals, the minister has also proposed that valuations at which private equity funds are raised by ‘companies in which the public is not substantially interested’ (which includes start-up companies) will no longer be questioned.
Therefore, venture capital funds and private equity funds are now brought at-par as far as this issue is concerned and thereby reducing the regulatory arbitrage available.
There is also some relief for cross-border M&A transactions. There are many examples of M&A transactions getting stuck in negotiations over withholding tax issues. The finance minister has proposed to assuage this fear by providing that the deductor in question will not be held liable as ‘assessee in default’ if the non-resident has paid the taxes, filed tax returns and furnishes an accountant’s certificate in this regard. This move will help close M&A transactions quickly.
(The author is with Kochhar & Co, a law firm. Views expressed are personal.)
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