In a major incentive, startups can now issue shares to investors at higher than fair value without worrying about tax consequences.
The Central Board of Direct Taxes (CBDT) has notified the much awaited tax exemption on investments above fair market rate for startups.
“The exemption provided to startups from the ‘rigour’ of section 56(2)(viib) of Income Tax Act has been long awaited,” Amit Maheshwari, Partner Ashok Maheshwary and Associates LLP, said.
The effect of the CBDT’s notification is that in case a startup gets investment from resident angel investors, family offices or funds which were not registered as venture capital funds, it will not be taxed even if the investment is made in excess to the fair value.
“It has been a long standing industry demand to abolish this Angel tax,” Maheshwari said.
A startup is a company in which the public are not “substantially interested” and conforms to certain conditions as prescribed by the Department of Industrial Policy and Promotion (DIPP) in February this year.
Under Indian tax law, if an Indian company receives share subscription amount from an Indian resident which exceeds the fair value of shares, then the excess amount is taxed as income of the Indian company, said Rajesh H Gandhi, Partner, Deloitte Haskins and Sells LLP.
“The notification now exempts startups from this rigorous provision. This is a welcome relaxation and would ensure that startups can issue shares to investors at higher than fair value without worrying about any tax consequences,” Gandhi said.
A similar exemption already exists for Venture Capital Funds (VCFs).
Maheshwari said this Angel tax still poses threat to earlier investments which could be perceived as being overvalued in light of the declining valuations globally and in India.
Last week, the DIPP has launched a portal and mobile app through which startups can gather all latest updates on various notifications, circulars issued by various departments and different funding agencies.
In January, Prime Minister Narendra Modi had unveiled a slew of incentives to boost startup businesses, offering them a tax holiday and inspector raj-free regime for three years, capital gains tax exemption and Rs 10,000 crore corpus to fund them.
Prime Minister Narendra Modi (right) and Finance Minister Arun Jaitley at the first Rajasva Gyan Sangam in New Delhi.
Prime Minister Narendra Modi pitched for nearly doubling of tax base to 10 crore assesses while addressing tax officers in the first ever Rajasva Gyan Sangam that kick-started on Thursday.
Modi outlined a five-point charter for tax administrators – RAPID, which stands for Revenue, Accountability, Probity, Information and Digitisation to reform the taxation system in the country.
MODI’S FOUR COMMANDMENTS FOR TAX DEPARTMENT:
Increase tax base to 100 million people from 54.3 million now
Focus on RAPID: Revenue, Accountability, Probity, Information and Digitisation
Ensure simplification and go for total digitisation
Turn Gyan Sangam into a Karma Sangam, so ideas generated here lead to concrete action on the ground
In an hour-long interaction, he urged officers to build a ‘bridge of confidence’ between tax payers and tax officials, stressing on incorporating a sense of trust in the system so that they pay taxes without fear or harassment.
“While there should be respect for the rule of law among all citizens, and even fear of the long arm of the law for those who evade taxes, people should not fear tax administrators,” Modi said in his interaction with tax officers.
Citing the example of the “Give it up” initiative for voluntarily giving up gas subsidy, he said that the tax base too could be increased significantly, provided the tax administrators can demonstrate the leadership to bring about a change.
This is for the first time that the two boards — Central Board of Direct Taxes and Central Board of Excise and Customs — came together for the joint conference. Earlier they held separate conferences with the Finance Minister as the chief guest.
Modi said that tax officials should act like “mentors of taxpayers” and not treat them as “tax evaders”.
“People of India are inherently honest. If you build trust then people will pay taxes and you will be able to achieve the target,” Modi said.
The conclave will deliberate on a host of issues related to taxpayer services and effective implementation of fiscal laws and government policies with discussions around government’s financial inclusion initiatives, ensuring a transparent tax regime for businesses and foreign investors besides issues and challenges being faced by the two tax departments.
Minister of state for finance Jayant Sinha in a briefing after the first session said, “Prime Minister laid out certain goals and objectives for the officials to increase the tax base to 10 crore from 5.43 crore at present.”
Sinha said of the 25 crore households in the country, 15 crore are agriculturalists and hence the remaining 10 crore should be under the tax net.
Modi in his speech said 92% of tax department revenue comes from TDS, advance tax and self assessment tax, while the remaining 8% comes after scrutiny.
He said if 42,000 officials of CBDT are engaged for ensuring direct tax revenue, then the tax net should increase further.
Stating that the country is filled with “aspirational people”, Modi urged the taxmen to take steps so that people find it easier to pay taxes here.
Prime minister emphasized that people in India mostly pay taxes and the number of people who want to evade it is less.
“People don’t have problem in paying tax. So there is no question of tax evasion. The issue is how much cooperative are we in dealing with people. He said you should behave like mentors with the people rather than evader… If you become taxpayer friendly, then taxes will automatically come to you,” Modi said.
During the brainstorming session, he pressed officers to move towards digitisation besides making tax administration better and efficient.
The two-day Gyan Sangam is being attended by close to 250 officers of the rank of Principal Chief Commissioners, Chief Commissioners and Principal Commissioners from CBDT and 170 from the CBEC.
During the interaction, Modi said if someone Googles ‘how to pay taxes in India’, there will be seven crore results. If the question of ‘how not to pay taxes in India’ is put to Google, there would be 12 crore feeds.
The tax officials in their interaction with the prime minister gave a host of suggestions, which included to setting up of National Tax Facilitation Act to regulate basic norms of tax collection.
Ideas and views were expressed on diverse subjects such as digitization, voluntary tax compliance, facilitation for taxpayers, increasing the tax base, upgradation of digital and physical infrastructure for tax administrators etc.
Modi urged officers to turn the Gyan Sangam into a Karma Sangam, so that the ideas generated from this conference lead to concrete action on the ground.
As many as 15 officers from the CBDT and CBEC posed their questions to Prime Minister on various issues being faced by them in their regular work.
The issues included dilemma over whether officials should act as law enforcement agency or taxpayer friendly agency while collecting due taxes from people.
They also raised the issue of voluntary tax compliance, increasing tax base, upgradation of digital and physical infrastructure for tax administrators.
Switzerland today said it will relax norms for providing information to foreign nations seeking banking details about their citizens on the basis of ‘stolen data’, a move that would benefit India in its fight against the black money menace.
In the case of stolen data, Swiss authorities would extend assistance on tax matters to other countries provided such information was procured through normal administrative assistance channels or from public sources.
The proposal, which has been adopted by the Swiss Federal Council, also comes at a time when India is making efforts to bring back unaccounted money stashed by its citizens overseas. The issue of black money also figured during the discussions between Prime Minister Narendra Modi and Swiss President Johann Schneider-Amman earlier this week.
The Swiss government today said the practices with regard to “stolen data are to be eased”.
“It should become possible to respond to requests if a foreign country obtained the stolen data via normal administrative assistance channels or from public sources,” it said in a release.
However, administrative assistance is still not possible if a country actively acquired the stolen data outside of administrative assistance proceedings.
In this regard, the Federal Council today adopted the dispatch on amending Tax Administrative Assistance Act.
The Bill is expected to be discussed by the Swiss Parliament this year.
Known for its banking secrecy practices, Switzerland has been facing international pressure as countries step up efforts to curb illicit fund flows.
In 2013, the Federal Council had suggested easing administrative assistance practices in the case of stolen data but at that time, the proposal was rejected by majority of the cantons, parties and business associations.
Since then, international practice has established that exceptions to the exchange of information would be tolerated only on a very restricted basis, the release said.
“For instance, the exchange of information could be refused if it is incompatible with public policy, such as in the case of requests motivated by racist, political or religious persecution,” it added.
The Swiss government emphasized it intends to respond to future requests that are based on data obtained by the requesting state from another state through normal administrative assistance channels or from public sources.
“The consultation revealed that the cantons are virtually all rallying behind the proposal, while the numbers of advocates and opponents in the political parties and organisations appear broadly balanced.
“The Federal Council is adhering to the proposal in view of this outcome, as it believes that the proposal is necessary to safeguard Switzerland’s interests,” it noted.
Last month, Switzerland started the process for an ordinance to put in place a mechanism for automatic exchange of tax information.
During Modi’s visit to Switzerland earlier this week, Swiss government assured India of stepped up cooperation with regard to black money issue.
“Combating the menace of black money and tax evasion is also our shared priority. We discussed the need for an early and expeditious exchange of information to bring to justice the tax offenders.
“An early start to negotiations on the Agreement on Automatic Exchange of Information would be important in this respect,” Modi had said at a joint media interaction with Schneider-Amman.
Under the bilateral treaty for administrative assistance and exchange of information with Switzerland, India has sought details about numerous individuals and companies from the Alpine nation as part of its crackdown against those stashing illicit funds there.
The income-tax returns filing season is fast approaching with the initial deadline being July 31.
The income-tax returns filing season is fast approaching with the initial deadline being July 31. You must be among those preparing to file your returns. But most tax assessees who are required to e-file their returns keep deferring till the last moment.
However, even if you are procrastinating, you need to be prepared with all the details that you need to provide in your tax returns. And for that you need a lot of documents to be with you. It may not easy to source these documents at the last moment since some have to obtained from your office, some come by mail and others need to be downloaded. And even if you have all of documents with you, you need to have them filed in a file that is easy to locate.
So what are these documents that you need to keep handy at the time of filing? FeMoney asked tax expert Sudhir Kaushik, Co-founder and CFO, Taxspanner.com on documents that are a must in hand. “Keeping documents like Form 16, Form 26AS and home or education loan certificates for obtaining deductions would ensure that your tax filing is hassle-free and complete,” Kaushik said.
Here are a list of documents that Kaushik says one should be ready with while filing tax returns:
Form-16 and Form-16A
Form-16 is the most basic source of information about the income earned and the tax deducted from your salary during the year. In case you have worked for more than one employer during the financial year 2015-16 then you must collect your Form 16 from all of them. Form 16-A form is also called a Tax Deducted at Source (TDS) certificate and is issued by banks for interest income, capital gains of NRIs, etc. If you have rental income and your landlord has deducted TDS on rent then you should collect Form-16A from the landlord too. Similarly, if you have any commission or professional income, TDS certificate for the same should also be collected.
Form-26AS
Your income from all sources, tax deductions and any high-value transaction(s) are reported in this form. I-T department sends notices if the ITR filed by the taxpayer does not match with the information available in Form-26AS. You should get your Form 26AS and match details with your ITR before filing it. If there is some mismatch, you should fix those errors and then file your return. You can download Form-26AS from your net banking account, directly from income-tax department’s website.
Bank statements from all bank accounts
You should verify that all the bank transactions carried out during the financial year with respect to income earned, investments made, expenses etc. have been declared in the appropriate sections of your return. This would show dividend income or gifts received above Rs 50,000 on which tax needs to be paid.
Home/education loan interest certificates
If you have taken any home/education loan then collect their interest certificate from the lender to claim the right deduction.
Investment proofs not submitted to employer
It is possible that some of the investments made by you during the financial year have not been included in the Form-16 issued to you. For example, if you invested in tax-saving tools such as life insurance, Public Provident Fund after proof submission deadline set by your employer, proofs of these investments would not have been submitted to your employer. For such investments, you need to have the proofs for reference while preparing your return.
Share/mutual fund transaction statements
These are required to enter details like sale date, purchase date, quantity and amount for computing capital gains/loss.
Tax payment challan(s)
If you have paid advance tax and/or self assessment tax then you need to enter the details of the same in your return for accurate computation of tax liability.
The Income Tax department has launched an ATM-based validation system for filing e-ITRs by taxpayers as part of its measure to enhance the paperless regime of filing the annual IT returns.
“Now, Electronic Verification Code (EVC) can be generated by pre-validating your Automated Teller Machine (ATM) provided by the bank where a taxpayer has an account. While SBI has activated the facility beginning yesterday, other banks will follow soon,” a senior IT official said.
Last month, the department had launched the bank account based validation facility in this regard for those who have not availed internet banking facility. The new facility is available on the official e-filing portal of the department – http://incometaxindiaefiling.gov.in/ and will work by using the One Time Password verification system as activated by the department last year by using the Aadhaar number.
With the income tax department allowing ample time for filing returns, many taxpayers take it easy.
For the income earned in the past financial year (FY16), a taxpayer can file returns up to March 2018. However, sticking to the first deadline of July 31 has its benefits.
Say, you make a mistake while filing returns – it can be a wrong computation or incorrect bank account details.
If you file returns on time, the income tax (I-T) department will allow you to revise it as many times as you wish until the end of the assessment year.
In case of belated filing, the taxpayer loses this advantage.
“Not being able to revise returns can lead to problems. For example, in case of wrong computation, the department can send a notice. Incorrect bank account details can delay refunds,” says Vikram Ramchand, founder, Makemyreturns.com.
Missing the first deadline also means that the taxpayer cannot carry forward certain losses.
The Income Tax Act allows individuals to carry forward losses under the ‘capital gains’ head and also business losses for professionals and businesspersons.
These can be adjusted against the future gains for up to eight years.
Due to the correction in stock market in the last financial year, many investors would have suffered a loss in their equity trade.
Filing returns on time can help them utilise these losses in the coming years.
“The only loss that’s allowed to be carry forward for latecomers is the loss from house property,” says Ramchand.
This is the deduction that a person gets on the interest portion of a home loan under Section 24.
Though the deduction can be claimed in the subsequent year, the total limit for deduction will remain Rs 2 lakh for first-time home buyers. In case of a house property that’s not self-occupied, the entire interest can be claimed as deduction.
For those filing belated returns, they will also need to shell out a penalty.
There will be a one per cent penalty every month under Section 234A on the liability if the return is not filed on time, according to Kuldip Kumar, partner and leader (personal tax) at PwC India.
Professionals and businesspersons will also need to pay one per cent penal interest per month under Section 234B, if 90 per cent of the tax is not paid by March 31.
If you don’t file returns at all, there are provisions in the I-T Act that say if the tax due is more than Rs 3,000, the taxpayer can be prosecuted and jailed.
Ramchand says that in his experience, he has also seen that those who file returns on time get faster refunds and their filing is processed quickly, too.
Last year, many taxpayers who filed before the deadline got refunds within a fortnight, according to Ramchand.
However, in case of belated filing, the processing and returns are both delayed – it can easily take six to eight months.
Also, those filing belated returns usually see that their refund amount is adjusted against some pending tax demand of the past, according to tax experts.
Although this is not a rule, tax experts say such cases of adjustments are higher for those filing belated returns.
PwC’s Kumar points out that in the recent Union Budget, the period of filing returns has been reduced from two years to one year.
Taxpayers will need to file returns before the end of the relevant assessment year.
This will apply from the next assessment year.
Therefore, it’s beneficial, one should start filing returns on time to avoid hassles later.
A recent clarification by the government has created a stir among some multinationals which are concerned that their Indian entities might be taxed even in case of a global merger and acquisition with another global company.
More so, the worry is in case of multinationals that hold intangible assets in India, either through research and development centres, or are engaged in businesses where it is tough to value assets.
This is mainly because tax component, if at all, would be decided on valuation of the Indian entity, and whether valuation (Indian entity) accounts for more than half the holding entity outside India. This comes in the wake of the Central Board of Direct Taxes (CBDT) announcing rules for determining fair market value in case of indirect transfer of shares of an Indian entity. Rules specify a method for determination of “fair market value” of foreign target company shares and Indian company shares. In case of an indirect transfer of shares or transaction, if the value of Indian assets is more than 50% of the foreign target company, this could lead to taxation in India.
So if an US-headquartered company invests in India through a Mauritius company and at any point in time there’s a change in ownership, the tax could be applied. The tax would be triggered in India if the ownership of the Mauritius company is changed, and if more than 50% of the total assets of this company (Mauritius company) are in India.
“If a multinational has a presence in India through an intermediate holding vehicle in a third country, and if there is an M&A deal at the intermediate holding entity level, the Indian entity can attract taxation in India,” said Amit Singhania, Partner at Shardul Amarchand Mangaldas.
“While the 50% rule applies, valuing the Indian assets, particularly the right of management or control in an unlisted Indian company would be challenging,” Singhania said.
Many multinationals are now rushing to their Indian tax consultants to find out which transactions could attract tax here. “Many multinationals that have a presence in India through Mauritius could face some tax in India even if there is an offshore M&A deal, especially where the seller is based in a country whose treaty does not exempt capital gains tax in India,” said Rajesh H Gandhi, partner, tax, Deloitte Haskins and Sells.
“However, more importantly, it could be challenging to identify and value some of the assets and determine the place where they are situated. This would be more relevant for assets like human resources, contractual rights and intangibles such as mobile applications, results of R&D or patents developed in India but registered elsewhere,” said Gandhi.
Industry trackers say that in case of an M&A at an international level, the shares of holding companies are transferred or merged, which is where the problem lies. Many experts also point out that information and documentation required to ascertain the valuation of Indian as well as an intermediary is not just complicated but tough to come by in many cases.
“If so, income tax would assume the Indian entity’s valuation is more than 50% of the holding entity,” said a consultant currently advising such a client. Experts point out that patents held by the Indian company, and some other assets too have to be valued. Not only valuing these intangible assets could have different views, in some cases, these patents or other intangible assets are developed in India but sit on the balance sheet of other group companies outside India.
In a major incentive, startups can now issue shares to investors at higher than fair value without worrying about tax consequences.
