Income Tax department may levy tax on startups

June 02, 2016 10:11

The Economic Times reports: Startups worried over funding prospects and falling valuations could soon have a bigger problem on their hands. The income tax department is discussing a controversial move to levy tax on those startups whose valuations have fallen recently on the grounds that the first premium was more than the firm's fair value.

Tax officials believe that Section 56 of the Income Tax Act confers on them the power to levy excess consideration, more than the fair value, against issue of shares.

"Any consideration received by a company (start up) from a resident, against issue of shares, exceeds the fair market value of such shares, such excess consideration is taxable in the hands of the startup, as an income," Section 56 (2) (vii) (b) of the Income Tax Act says.

Valuations of many startups have fallen sharply in recent times on worries over profitability, growth and intense competition.

Read more HERE

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