Venture capitalists and private equity funds may breathe easy, as the Finance Ministry has indicated a relook at clause 21 of the Finance Bill.
According to the clause, an investment received by an entrepreneur in an unlisted entity from a private funding source may be deemed as income and 30 per cent of the amount taxed.
Mr R. Gopalan, Economic Affairs Secretary, told
This clause had evoked sharp response from venture capitalists and angel funds, who feel that such a clause will kill entrepreneurship. They feel that such a provision will also lead to unnecessary harassment and litigations.
The Finance Bill, 2012 proposes to insert a new clause in section 56(2) of the Income-Tax Act. It says, “The new clause will apply where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares.”
In such a case, if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value (FMV) of the shares shall be chargeable to income tax under the head “Income from other sources,” it explains.
Although the proposal clarifies that this provision will not apply in case the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund.
However, the catch is that for getting the status of a venture capital company or venture capital fund (which gives money) and venture capital undertakings (which receives money), it is required to take approval from SEBI.
Commenting on the clause, Mr. S.M. Sundaram, Partner and Chief Financial officer at Baring India, a private equity fund, felt that the provision to tax the difference between FMV and the issue price of shares in the hands of the company is fraught with pitfalls.
“It would only give rise to unnecessary harassment and litigation, especially when people who are not equipped to determine such FMV taking into account nature of industry etc are involved.”
Mr Saurabh Srivastava, co-founder of Indian Angel Network, explains, “An angel investor may invest Rs 1 crore in a company that has no revenues and no profits and the tax official, unless otherwise ‘persuaded', would tax the company at 30 per cent for no reason at all and convert an investment into income.”