The Ministry of Commerce and Industry has partially modified Notification G.S.R. 364 (E) [Read more about this here] yesterday, 16 Jan 2019.  The salient features of the latest notification [G.S.R. 34 (E)] are as follows

• Only startups recognised by DIPP would be entitled to apply for exemption u/s 56 (2)(viib), the section that deals with taxing ‘super premiums’ received by companies.
  • The application shall be made in Form 2 and shall be accompanied by
    • the annual accounts, and
    • income tax returns of the startup; since incorporation & for a maximum of the last three financial years.
  • The aggregate capital of the startup (face value + premium) post investment proposed shall not exceed Rs. 10 Crores. This limit remains the same as G.S.R. 364.
• The investor / proposed investor, for the previous year shall have
  • returned income of Rs. 50 lakh or more, and
  • net worth exceeding Rs. 2 crore or the amount of investment made / proposed to be made
• Form 2 shall be transmitted by DIPP to the Central Board of Direct Taxes (CBDT). CBDT shall get 45 days to approve the investment or reject the application.
• Approval can be requested for shares already issued. However, no application shall be made if assessment order has been passed by assessing officer.
• Merchant banker certificate is no longer required.

BCL India comments

G.S.R. 34 (E) does little to mollify the concerns of the startup sector.

Firstly, the notification does not amend the existing valuation rules. Of course, the Ministry of Commerce is not the relevant authority to modify the Income Tax Act & Rules, but the crux of the matter is that the valuation norms should change. Without this change, it would be hard to approve applications as there is no statutory framework currently available [other than that under 56(2)(viib)] to ratify / validate the valuation agreed to between the investor and the startup.

Secondly, the limit placed on capital remains unchanged, i.e. Rs. 10 Crores. This inhibits the startup to accept more money to grow its business. Thus, any fund raise that takes the aggregate capital beyond Rs. 10 Crores would still be subject to scrutiny.

Thirdly, startups whose investments have already been assessed cannot apply for relief under G.S.R 34 (E). The only recourse available to these startups would be to knock the doors of CIT (Appeals).

Finally, rejection by CBDT would be an open invitation to scrutiny by the tax authorities. The issue thus remains as contentious as before.

We may have to wait for the budget to provide lasting relief or clarity on this subject. Let’s hope 1 February 2019 brings startups some good news!

You can read the full notification below

[pdf-embedder url=”https://bclindia.in/wp-content/uploads/2019/01/195283_V2.pdf” height = “700”]

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