Budget 2018: Only 20-30 start-ups have been sent notices by the tax department over excessive valuation, Central Board of Direct Taxes (CBDT) chairman Sushil Chandra said on Monday. He added that the department has been asked to not press the tax demands unless the first appeal has been decided in its favour. In the last few months, several start-ups have found themselves in legal trouble with the taxman wanting to tax the “excessive valuations” – the difference between the fair market value and the value assigned by the investors. The tax authorities in these cases have gone by traditional methods like discounted cash flows for judging what the correct value of a company should be. Entrepreneurs, however, contend this method doesn’t apply to start-ups in new areas, especially tech ones.
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Speaking to an industrialist at a post-Budget event, Chandra said some companies have been arriving at highly exaggerated valuation where a share worth Rs 10 was being purchased at Rs 10,000 without any proper valuation. This, he said, raised question mark on the entire methodology leading to rejection of valuation reports in some cases. “It’s not the case that we haven’t accepted valuation of every start-up. I found out from Bengaluru and Mumbai that there are only 20-30 companies whose valuation report has not been accepted. We have already issued instructions for that and we will not press for demand till the first appeal is decided,” he said.
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The Budget has extended concessions for start-ups by two years to 2021 and had also widened the definition of companies that can qualify for sops, he said. Further, the department had aligned its stance with that of department of industrial promotion and policy (DIPP) to ensure clarity prevailed, Chandra said. All start-ups have to register with the government and there is a tedious procedure to get tax exemptions; the definitions were also subjective since, for instance, the start-ups had to be ‘innovative’. “We have made some relaxation in definition also, earlier it was innovation …now we are saying it (a start-up) should be involved in that particular work of innovation, — it may come, it may not,” Chandra said.