Legal Battles Mount As Startups Contest Tax Demands Post ‘Angel Tax’ Easing

By: Admin
April 27, 2024
Categories: Income Tax|Income Tax News
4 Min Read

Seven months after the Indian tax authorities eased the valuation norms for foreign investments in startups, in an attempt to address concerns over the controversial “angel tax,” the situation has only grown more turbulent for these fledgling firms.

According to industry insiders and tax experts, numerous startups have already filed legal challenges against the tax demands levied on them, with more gearing up to follow suit.

At the crux of these disputes lies the tax department’s stance on differing with or altering the valuation methods adopted by startups, despite the firms adhering to the prescribed guidelines.

“The tax rules don’t mandate startups to choose any specific method for valuing the investments; it is at the option of the startups to choose a valuation method,” an expert said and citing legal precedents that support the taxpayers’ right to choose their valuation approach.

The contention surrounds the taxman’s attempts to impose alternative valuation methods, even when startups have employed legitimate techniques like net asset value (NAV) or discounted cash flow (DCF) analysis.

“In one case, a startup chose the NAV method, but tax authorities questioned why it didn’t opt for DCF, as it is a new entity without a historical asset value,” a source revealed.

With over 100 startups facing tax demands amounting to hundreds of crores under the angel tax provisions, the situation has become a significant impediment to their growth and expansion plans.

Experts argue that determining the fair market value of early-stage startups is inherently challenging due to limited financial data, often leading to protracted disputes with tax authorities and unnecessary burdens.

“The potential for more litigation around angel tax creates uncertainty for investors, discouraging them from funding startups and limiting capital availability,” another expert.

While the government has exempted certain startups recognised by the Department of Industrial Policy and Promotion from the angel tax provisions, industry stakeholders are calling for further streamlining and simplification of the regulations to foster an environment conducive to innovation and entrepreneurship.

As the legal battles intensify, the spotlight remains on the government’s ability to strike a balance between safeguarding tax revenues and nurturing the nation’s burgeoning startup ecosystem.

Source from: https://knnindia.co.in/news/newsdetails/sectors/legal-battles-mount-as-startups-contest-tax-demands-post-angel-tax-easing