The Ministry of Corporate Affairs has issued notices to 2000 startups regarding share premium calculations. The MCA has asked the startups to come with explanation and also about the details of fund-raising transactions.
The latest government department, the Ministry of Corporate Affairs (MCA) is asking questions. Questions are concerning the premium paid to the shareholder by investors in startups. It is also seeking explanation about the valuations and exemptions of start-ups.
The Ministry is questioning the valuations at which these startups raised funds. Notices haves been issued to these startups. The notices have been issued in the past 45 days. The ministry has sought explanation whether they have sought exemptions under any government scheme.
In a number of start-ups, the primary funding will be made by an angel investor at valuation of 2X, the second round by a VC at 2X. The income division will then calculate the true worth of the start-up based on the PE’s funding. The tax will be calculated on the funding made by the angel investor.
The ministry has questioned the valuations at which these 2000 startups have raised money. The focal point is on these start-up companies whose valuations have fallen after the first round of fund raising.
View of Income tax Department:
The Income Tax department had demanded the start-ups to pay tax at the rate of 33% if their valuations fall after the first round.
According to some tax experts the valuation of start-ups depend on numerous factors. The important factor being future projections.
The Finance Minister of India in 2012 amended Section 56 of the Finance Act 2012. The ‘Income from Other Sources’ was redefined. In the redefined section, 30.9% tax was applicable on the capital raised by unlisted companies from any individual against an issue of shares in excess of the market value.
Under Section 56(II) of the Income Tax Act of India the tax was classified as ‘Income from other sources’. This later became popularly known as angel tax in the Indian startup system, as it brought down the angel investments in India,
All the regulatory procedures of start-ups are held up till the start-ups respond satisfactorily to the MCA notices.