Far from Saral

Even as start-ups and their investors fret over the levy of angel tax on equity infusions, the Central Board of Direct Taxes (CBDT) has come up with yet another googly to complicate their lives. In its latest set of Income Tax Return forms for 2018-19, it has called for individual investors to disclose the excess consideration, if any, received from the sale of unquoted shares over and above their ‘fair market value’. The intent behind this is unexceptionable. Billions of dollars in angel funding have flowed into Indian start-ups lately. As each venture receives successive rounds of funding, incumbent investors get to pocket substantial capital gains on exit, information on which is often hidden from the public domain. Requiring individual investors to disclose such deal values will allow the taxman to not just levy tax on the specific investor, but also to cross-verify valuation claims across investors in a venture, and ensure a consistent basis of valuation over time.

But the headaches for angel investors may lie in the taxman’s interpretation of the term ‘fair market value’. ‘Fair value’ assessments even for listed entities are a subjective exercise, which yield widely varying numbers based on the method used, market conditions and investor fancy for the sector. In the absence of profits or tangible assets, the valuation of new-age start-ups is an even more qualitative exercise. They do not easily lend themselves to textbook methods for arriving at the ‘fair market value’. The new ITR disclosures can therefore open up a Pandora’s box of discretionary assessments and disputed claims between start-up investors and their assessing officers. If the Centre is keen to provide impetus to start-up funding, it should ideally refrain from prescribing valuation methods and allow buyers and sellers to be the arbiters of deal valuations.

It is not just start-up investors who are expected to now disclose more. The new ITR forms require salary earners to provide breakups of their salary already captured in Form 16, call for additional details on house property and carve out new forms with lengthy investment and bank account disclosures for high-income earners and NRIs. In the last few years, contrary to the stated purpose of moving to simpler tax filings, the CBDT has demanded more and more intrusive details from taxpayers, to aid its data collation efforts. Given that the Department already collects prodigious amounts of data at source from banks, TDS deductors and facilitators of high-value transactions and has made taxpayers jump through hoops to link PAN and Aadhaar to their ITRs, it is surprising that it can’t put Big Data and mining capabilities to better use. Subjecting the entire taxpaying population to a rising compliance burden to crack down on a few bad apples is anything but a friendly tax regime.

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