The Revenue Department would have to withdraw tax demands sent earlier as the circulars are binding on the Income Tax Department
Companies facing a 30-percent tax bill over valuation premium may not face the tax bump as the government has recently asked officials not to scrutinise such transactions, according to a report by The Economic Times.
The clarification comes after many firms received tax demands after premiums were paid over the 'fair price' or 'fair market value' for fresh equity or preference shares. The demands could be withdrawn in the coming weeks, a source told the paper.
On a notification dated December 31, the government said fresh issuance of shares at a premium, in most cases, should be outside the tax ambit. "The clarification would positively impact all situations where valuations were challenged by the taxman for fresh issuance of shares," Deloitte India partner Rajesh H Gandhi told the paper.
The Revenue Department would have to withdraw tax demands sent earlier as the circulars are binding on the Income Tax Department, except in cases where litigation is on and the case is pending before the courts, Gandhi added.
The department had asked the companies to pay 30 percent tax on the differential over and above the fair market value in December 2018, according to the report. It had issued notices under two I-T sections: 56(2) and 68.
Section 56(2) covers the issue of shares while Section 68 deals with unexplained cash credits. Experts told the paper that the clarification is a recognition that such valuation premiums can be legitimate.
The tax regulations were modified in 2010 to prevent money laundering. "The intention of bringing this section in the Income Tax Act, 1961, was to prevent the transfer of shares at substantially less value done with the intention to facilitate the conversion of black money," Amit Maheshwari, partner, Ashok Maheshwary and Associates told the paper.
The intended consequence of this provision was that it could have been invoked even in case of fresh issue of shares, Maheshwari added.
The move may also bring some relief to startups on the angel tax front. Experts told the paper that while the clarification doesn't specifically deal with the I-T law used to tax premiums involving startups, the logic could be extended to them.