Closely held companies used to issues shares at substantial premium to convert black money into white money without providing any valuation justifying the premium. Thus, the Finance Act, 2012 inserted Section 56(2)(viib) to impose tax on closely held companies receiving consideration for shares in excess of fair market value.
Valuations of start ups have fallen sharply, recently, on worries over profitability, growth and intense competition. The Income-Tax Dept. discussed a controversial move to impose tax on those startups under the garb of Section 56(2)(viib) on the ground that their last round of valuation was lower than the first round. This move was likely to upset startups who were already worried over funding issue and falling valuations. Thus, there had been a long standing demand of the industry that the Govt. should either do away such tax on startups or provide a threshold exemption limit.
Now the CBDT has abolished such tax on start ups. Any consideration received by start ups from resident persons in excess of fair value of shares shall not be charged to tax as income from other sources under Section 56(2)(viib).
Editor’s Note : However, this benefit is not available for all startups. Tax exemption is available for only those startups which fulfill the conditions specified in notification of Govt. of India, dated 17-02-2016.