Why start-ups are finding themselves in legal trouble and what Income Tax dept is doing with them

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New Delhi | Published: December 20, 2017 6:09:34 AM

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’.

Several start-ups are finding themselves in legal trouble with the tax man wanting to tax the excessive valuations they are getting from early-stage investors.

Several start-ups are finding themselves in legal trouble with the tax man wanting to tax the excessive valuations they are getting from early-stage investors. While the tax man looks at traditional methods like discounted cash flows for judging what the correct value of a company should be, entrepreneurs say this method doesn’t apply to start-ups in new areas, especially tech ones. With the number of start-ups getting such notices rising to alarming levels, former Infosys CFO TV Mohandas Pai, currently chairman of Aarin Capital, took to Twitter to petition the government. “Sir start Ups are getting harassed by IT for raising Capital,threatening to consider it as income!very bad scene and very many are angry and upset,may shift overseas. Appeal process broken, takes 15 years. Pl intervene,” he tweeted. A couple of years ago, when it was pointed out that many start-ups were preferring to register in countries like Singapore to avoid regulatory problems in India, the government’s start-up policy had attempted to fix this. This has, however, not helped as the policy is cumbersome.

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’. According to Sanjay Khan Nagra, senior associate at Khaitan & Co and fellow at IT think tank iSpirt, you can’t blame assessing officers who are sending these tax notices since they are just going by the book and the rules were brought on to the statute to prevent tax fraud. For this to be fixed, the government will have to revisit the rules and make it less bureaucratic and subjective. Sunitha Ramaswamy, head of deals at online funding platform Letsventure, said that the prescribed methodology of valuations is redundant and outdated.

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