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Crackdown on share premiums in unlisted firms won’t hurt fair businesses: Income Tax officials

LiveMint logoLiveMint 08-09-2017 Gireesh Chandra Prasad

New Delhi: The income tax (I-T) department’s ongoing crackdown on a method used by some politicians to accept bribes—charging a high premium for shares in unlisted companies promoted by them—has raised concerns among several start-ups, but tax officials say genuine companies which get the math right on their worth will be spared.

Many unlisted companies have, in the recent past, received notices seeking explanations for share premiums received, raising apprehensions about the capital raised getting taxed as “other income”. But tax department officials said only companies that have no actual business and act as vehicles for financial crimes will be pursued.

An official, who spoke on condition of anonymity, explained that taxing the premium received for shares in unlisted companies that cannot be satisfactorily explained by the recipient is an anti-abuse provision. Section 56 (2) viib was introduced in the Income Tax Act in 2012 in the wake of the telecom spectrum scam and is meant to be a deterrent against abusing the corporate structure for wrong doing.

“All that a company has to do is to show its worth as per valuation methods specified in rules. The provision covers only unlisted companies where public interest is not substantial,” said the official. Where public interest is substantial in terms of bank lending or equity participation, banks and regulators keep a close watch on such entities.

“While intention of the provisions of the law is quite clear, the concern among businesses seem to be arising from the manner of its implementation,” said Abhishek Jain, Tax Partner, EY India.

Some industry representatives feel that these I-T notices are making start-ups nervous. Sunil Goyal, managing partner and founder, YourNest, a seed fund, said that the I-T department’s notices under this provision go to every start-up raising money at a share premium.

“The provision was incorporated to stop black money being transferred from individuals to companies. But it has raised some concerns among start-ups as they have to now make several rounds of the income tax department to justify the fair valuation,” said Goyal.

Preeti Khurana, a chartered accountant and tax expert at Cleartax, said there is a disconnect between the way shares are valued by start-ups and by the tax department.

The move to seek clarifications on share premiums has been on since the provision was incorporated in the law in the Finance Act 2012.

Often, field officers suspect promoters of larger established companies too divert shareholder funds by issuing shares in unlisted entities owned by the promoters at a huge premium.

“Once shares in unlisted companies are issued at a high premium, the share subscriber becomes a minority shareholder in the unlisted company. Eventually, the minority shareholder’s stake is also bought back by the promoter at a lower valuation to take full control over the funds,” the first official quoted above said, explaining how the corporate structure is abused at times. Funds raised by notified start- ups and capital infused by venture capital funds and other regulated investors are not covered under this examination of fair valuation.

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