I-T Department Sends Notices To Start-Ups Over Investments Above Rs 100 Crore: Report

Some of these notices questioned the foreign investors’ local holdings, the valuation determined, and the purpose of the loan availed by investors

The I-T department has sought an explanation on the nature and source of the funds from the start-ups.

The income tax (I-T) department has reportedly issued notices to several start-ups, including some leading unicorns or those with valuations above a billion dollar, over unaccounted investments made between FY19 and FY21. The I-T department has sought an explanation on the nature and source of the funds, according to a report by Business Standard.

According to the report, each investment of Rs 100 crore or more is being probed. The total corpus, however, could not be verified. The tax notices were served under Section 68 of the I-T Act which deals with unexplained funds credited to the books of taxpayers and for those the source is not given, according to the report by the financial daily. The Section is invoked primarily to ascertain the identity, creditworthiness, and genuineness of the share issuance.

Some of these notices questioned the foreign investors’ local holdings, the valuation determined, and the purpose of the loan availed by investors. Quoting a source, the newspaper said, "An explanation is being sought, considering the growing menace of round-tripping of funds, the reason for which the angel tax provision has been extended to non-resident investors."

The official said that keeping in mind the regulatory framework, the negative list of the angel tax has been prepared. Sovereign wealth funds, pension funds and Sebi-registered portfolio investors from 21 jurisdictions will be exempt from the provisions of angel tax as they are regulated entities.

Citing anonymous sources, the newspaper reported that the government had got suggestions from private equity and venture capital (PE/VC) funds to ease the terms and conditions for angels. For instance, the draft rules, which currently exempt only stocks for price matching and the 10 per cent safe harbour, were proposed to be extended to convertible bonds as well.

Lalit Kumar, partner, J Sagar Associates, told Business Standard, “This proposal, although it primarily relates to tax, could have a bearing on foreign investment deals under forex rules. Inbound private equity transactions generally use convertible securities such as compulsorily convertible preference shares with a conversion ratio. If these securities are issued at a price higher than their valuation price, the difference in the two will be subject to angel tax.”