DPIIT to raise startups' concerns on 'fair market value' with FinMin

The Department for Promotion of Industry and Internal Trade (DPIIT) will take up the concerns of startups with the Union finance ministry regarding the discrepancy pertaining to the calculation of ‘fair market value’ under angel tax provisions, a person aware of the matter said.

Startups have raised concerns with the industry department that the calculation of the startups’ fair market value done internationally is different from the income tax department.

 “DPIIT is trying to get them (startups, department of revenue and economic affairs) on the conversation table, tell them that there is a discrepancy and find some solution,” the official cited above said.

The development comes in the backdrop of the Union Budget 2023-24 extending the angel tax provisions to transactions involving foreign investors, in line with the government’s anti-tax avoidance move and to bring parity in taxation for foreign and domestic investors. Earlier, these provisions were applicable only to local resident investors. 

As per the new provisions, angel tax will be applied on the premium to the fair market value (FMV) of a company’s shares during a funding round to raise capital. The excess premium received on sales of shares by an Indian unlisted company to a foreign investor will be construed as “income from other sources” and taxed.

The new provisions have become a cause of concern for privately held firms, as the amendment in the Finance Act, 2023 could hurt investment by overseas investors into India. Early-stage start-ups are likely to be the worst hit since they witness comparatively higher deviation in allotted share prices and fair market value.

Sandeep Jhunjhunwala, M&A Tax Partner, Nangia Andersen LLP said that the amendment has upset the apple cart for investors and investee companies who had the liberty to infuse vigorous premiums against share subscriptions above the FMV as the exchange control regulations only prescribed the FMV as a floor price. 

“With the taxation of premiums received from non-residents in excess of FMV, the benefit stands diluted. The investee company could be subject to income tax on such premiums which would add to the cost of fund raise,” Jhunjhunwala said.

Revenue secretary Sanjay Malhotra, however, had cited the government’s stance stating that if companies are selling shares at a premium to foreign investors at (a price) over and above the actual price/rate and making profit, then the government is taxing that profit. “The provision is already there for residents. If local residents invest, there is a tax, so why not tax non-residents,” Malhotra had said in February.