CAs excluded from fair valuation of start-ups

I-T notification leaves field clear for merchant bankers

The Income Tax Department has excluded chartered accountants (CAs) from assessing the fair valuation of start-ups.

The department’s notification on Friday to this effect leaves the task exclusively to merchant banks.

Naveen Wadhwa, DGM, Taxmann.com, said the decision to exclude CAs from assessing the fair valuation brings it in line with another rule that allows only merchant bankers to calculate the value of unlisted shares issued to employees under the ESOP schemes. He said the decision was arbitrary and unfair not only to CAs but to companies too.

In the notification, the department provided tax exemption for investments that small start-ups receive from angel investors above their fair valuation. The step comes as a relief to start-ups that have been complaining about tax on investments raised from angel investors. Some of them have received notices from the department.

Start-ups approved by an inter-ministerial panel are exempted from tax levied on firms issuing shares to investors above their fair value, treating it as income from other sources. This exemption was earlier available to investments from registered venture capital funds and foreign investors.

₹10 crore limit

As per the conditions, the exemption is meant for small start-ups whose paid-up capital and share premium do not exceed ₹10 crore after the share sale.

The angel investor should have had ₹25 lakh average income in the preceding three years or ₹2 crore net worth at the end of the previous fiscal. Infosys co-founder and angel investor S. Gopalakrishnan welcomed the move in a tweet.

According to DIPP, an entity shall cease to be a start-up on completion of seven years from the date of its incorporation/registration of if its turnover for any previous year exceeds ₹25 crore. In respect of start-ups in biotechnology sector, an entity shall cease to be a start-up on completion of ten years from the date of its incorporation/registration or if its turnover for any previous year exceeds ₹25 crore.