CBDT rewards Start-ups but penalizes CAs
Two notifications have been issued by the CBDT which deal with Section 56(2)(viib). This Section provides that when a closely held company (Pvt. Companies, Start-ups, etc.) issues shares at premium, which exceeds the fair market value of the shares, the excess consideration is taxable in the hands of the company.
The two notifications issued by the CBDT relate to valuation of fair market value of unlisted shares and to provide exemption to the start-ups from the applicability of this section.
The fair market value of the unlisted equity share is calculated at the option of the company either on the book value on the valuation date or as per discounted free cash flow method calculated by a Merchant Banker or a Chartered Accountant. The recent amendment by the 6th Amendment Rule has removed the Chartered Accountant from the list of authorized professional who can calculate the fair market value of the shares. Consequently, all valuations of unlisted equity shares on or after May 24, 2018 shall be done only by a Merchant Banker. This change has been made to bring this provision at par with Rule 3, which allows only Merchant Banker to calculate the value of unlisted shares issued to the employees under the ESOP Schemes.
This arbitrary decision to restrict the CAs and allowing only Merchant Bankers to evaluate the unlisted shares is unfair not only to the CAs but for the Companies as well. It is suggested that if CBDT intends to bring uniformity in the provisions, then CAs should be authorized for valuation of perquisites, being ESOPs, along with Merchant Bankers for the purpose of Rule 3..
Section 56(2)(vii) provides exemptions to certain companies from levy of tax on the excess securities premium if consideration for the shares is paid by the Venture Capital Undertaking or a Venture Capital Fund or such other company as may be notified. CBDT has extended this exemption to the start-ups, as they fetch immense securities premium due to the potential in ideas to generate revenue, and any levy of tax on the excess premium would have discouraged the technology based start-ups. Therefore, the CBDT notifies that this provision is not applicable if issuing co. is a registered start-up in view of Notification No. GSR 364(E), dated April 11, 2018.
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