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Budget 2012: Pay Tax On Angel Investments

i Mithilesh Kumar
Category: News
Date: 19/03/2012
Tags: news, tax, policy
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The UPA government has suggested a measure in the Union Budget 2012 which will kill angel investing and give birth to still-born startups in India. The Budget has introduced a new clause which will treat all individual investments (which will include genuine angel money also) in a company as "income from other sources", and they will be subject to a tax of 30% at the hands of the companies (including all genuine startups).

The government also brings in a concept of fair market value to calculate this taxable income. So the consideration received in excess of face value and also the fair market value will be considered for taxation. The problem is fair market value has to be "substantiated" to the satisfaction of assessing officer who is not an expert on valuation of especially emerging businesses (how will they value a Facebook or Twitter or an InMobi?).

The clause is reproduced from the Budget documents here:</>

Section 56(2) provides for the specific category of incomes that shall be chargeable to income-tax under the head “Income from other sources”.

It is proposed to insert a new clause in section 56(2). The new clause will apply where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares. In such a case if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to incometax under the head “Income from other sources. However, this provision shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund.

Further, it is also proposed to provide the company an opportunity to substantiate its claim regarding the fair market value.

Accordingly, it is proposed that the fair market value of the shares shall be the higher of the value -

(i) as may be determined in accordance with the method as may be prescribed; or

(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its assets, including intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.

This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years.

[Page 8-9 of memorandum (PDF doc)]

[source from vccircle]

posted by Mithilesh Kumar | suggest edit

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