Raising funds for your startup? Let the taxation be our headache!

India has seen a boost in the funding raised by budding entrepreneurs for their startups. As per a study conducted, Indian startups have raised USD 38 Billion and 25 Billion in 2021 and 2022 respectively. This figure is only set to grow manifold considering the potential these startups possess.

Raising funds by a startup is very unique and different. The valuations of modern-day startups may differ from the conventional valuation models used for valuing other Companies. For example, various startups would like to value their business based on GMV – Gross Merchandise Value – a metric that measures the value of Goods/Services sold. The valuations so derived may be different from the valuation derived using conventional methods. Valuing the businesses using unconventional means sometimes may lead the taxman to your doorstep.

As per the provisions of Indian tax laws, in case a Company raises money at an amount exceeding the Fair Market Value (as determined by the methods provided by the tax laws), then the difference between the Value as per the Company and the Value as determined by the tax department is considered as income in the hands of the Company and the said company is required to pay Income-tax on the same. You might be thinking, I have received money by issuing shares, how can that be considered as income? Well, the Income Tax Department sees it the other way around and would still tax you deeming the difference in the value as notional gains. (And guess what, the tax department has the final laugh here)

In order to promote the startup culture in India, the government has provided certain tax related relaxations in raising funds. The Government has issued a circular to the effect stating that an eligible startup registered with the Department for Promotion of Industry and Internal Trade (DPIIT) and receiving money on issuing new shares shall be exempt from these provisions of paying taxes, subject to certain conditions.

There are various other benefits of registering with the DPIIT. Some of the benefits a registered Startup have are:

1. Tax breaks for a period of 3 years u/s 80-IAC of the IT Act

2. Deferment of taxation on the perquisite value of ESOPs in the hands of the employees

3. Exemption from Capital Gains u/s 54(GB) of the IT Act

4. Self-certification under various labour laws

5. Registration of intellectual property

Get in touch with one of our experts to get your Company registered with the DPIIT and avail various benefits