What is the issue?
- IT department has sought more information regarding tax-payers as per its 2018-19 directives than previously sought.
- This rising disclosure requirements subject taxpayers to unnecessary burden and enhance compliance costs.
What is the new demand?
- While start-up investors are already worried over ‘angel tax’ on equity infusions, Central Board of Direct Taxes (CBDT) has presented another googly.
- 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.
- This information is often hidden from the public domain, and is now being demanded by the IT department.
- Individual investors will now have to disclose the excesses that are received from the sale of unquoted shares over and above their ‘fair market value’.
- Such a disclose 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.
- This would hence ensure a consistent basis of valuation over time.
What is the major issue with this?
- Fair Market Value even for listed entities is very subjective, and yield depends on the method of calculation, market conditions and investor sentiments.
- In the absence of profits or tangible assets, the valuation of new-age start-ups is an even more qualitative exercise.
- Hence, the disclosure requirements would open up a Pandora’s Box of discretionary assessments and disputed claims between taxmen and investors.
- If the Centre is keen to provide impetus to start-up funding, it should ideally refrain from prescribing valuation methods and leave it to the markets.
What are the other issues?
- In addition to this, high-income salaried people have been mandated to provide their salary breakup and give details on property, and investments.
- Contrary to the stated purpose of moving to simpler tax filings, the CBDT has demanded more and more intrusive details from taxpayers.
- While the IT department already collects a lot of data at source (from banks, TDS facilitators etc…), it is surprising that those aren’t being put to 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.
Source: Business Line
