Tax expert under income tax lens for evaluation of startup

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Mumbai / Ahmedabad: After challenging the valuation of startup, Indian tax officials have started inquiries consultants and accountants on the method of their enterprise-value estimates. Since August, officials have begun inquiries from valuers and tax experts on the basis of their valuation assessment, four people with direct knowledge of the matter told ET

Specifically, Taxmen want to know the reason behind the high valuation given to many startups in 2014 and 2015. Their experts say that their estimates are based on initial revenue and development-they have failed to achieve anything.

Tax officials say that the money received above and above the proper market value of startup should be treated as its income and not capital.

Many tax officials believe that the relevant section of the Income Tax Act gives them the power to tax on additional consideration.

"Macros were valuable in the startup 2014/15 based on economic scenario, revenue estimates and similar valuations, which were so prevalent, although it may be true that many startups were not able to achieve their revenue projections, but Unless it is clearly unfit or incorrect, it can not be fair. "MGB and Co LLP partner Jainendra Bhandari said,

ET talked to several evaluation experts, who had questioned last month. Tax experts say that startup was evaluated in the widespread economic conditions prevailing in 2014 and it is wrong to question these valuations in 2017.

An Income Tax Officer based in Mumbai confirmed the Valuation Experts of ETAT, now they are being questioned. "We are investigating that some of these investments were made to convert black money (illegal money) into white (legal money). Why is the real investment very less, why can one invest a higher amount in the investment?" They said.

However, this argument did not cut ice with experts. "Assessment is an art and there are many factors that determine the valuation at the scheduled time." Paras Savla, partner of KPB & Associates, said, although the department can target Shell companies, where evaluation of startup experts is being inquired, Where the real investment has been done. "

ET on September 7 reported that startups received tax demand on essentially the amount paid on the fair value of convertible priority shares.

Start-up co-founder Amit Singhal said, "A reading of Section 56 (2) (vi) (B) clarifies that the provision applies to resident investors, if the security is levied on premium shares. Based on the cash flow (DCF) method of calculating the fair market value of shares, there is a generally accepted practice among startups, which will be earned by business in the future and Lee is expected based on the cash flow. "

On the basis of proper transactions, the tax department assesses the appropriate market value and records of similar, comparable companies. This section is often applicable when it is doubtful that companies can issue shares on premium above fair value for the unauthorized cash laundering.

Many startup owners are worried about the new set of tax notices in the last few months. Saurabh Deorah, CEO of StartUp Advantage Club says, "We already have a tough fight and we do our best to comply." Even after ensuring compliance, even if the government send us unnecessary notice , It does not only take the time of the promoter but also the advice of the lawyer, which is why our focus is eliminated by running the main business. "