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Taxpayers Get Choice in Valuing Startup Investments (Angel Tax)

editor — Mon, 15 Apr 2024 05:00:14 +0000

The Delhi High Court ruled in favor of taxpayers, allowing them to select the method for valuing investments received from angel investors. This comes after a disagreement between a company (Agra Portfolio) and the Income Tax Department (IT Department) regarding the valuation of shares issued to an angel investor.

What is Angel Tax?

Angel tax refers to the tax levied on the difference between the fair market value (FMV) of shares allotted to an angel investor and the amount the investor paid for them.

The Case:

Agra Portfolio used the Discounted Cash Flow (DCF) method to determine the FMV of the shares. DCF estimates an investment’s value by considering its projected future cash flows. The IT Department, however, rejected this valuation and used the Net Asset Value (NAV) method instead. NAV calculates the value per share by dividing the company’s net assets (assets minus liabilities) by the total number of shares.

Court’s Decision:

The Court clarified that while the IT Department can question a taxpayer’s valuation report, it cannot impose a different valuation method. The Court emphasized that the Income Tax Act and Rules grant taxpayers the sole authority to choose the valuation method.

The IT Department can still scrutinize the report and conduct its own valuation (using the taxpayer’s chosen method) to challenge the taxpayer’s assessment.

Outcome:

The Court ordered the IT Department to re-evaluate Agra Portfolio’s case using the DCF method as chosen by the company.

This decision offers greater flexibility to startups and investors when determining the FMV of shares for angel investments.

Source: https://www.thehindubusinessline.com/economy/angel-tax-valuation-method-solely-assessees-choice-says-delhi-hc/article68043342.ece

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Mandatory E-Invoicing for Businesses with Turnover above INR 5 Crores

editor — Thu, 04 Apr 2024 05:17:18 +0000

The GSTN, in its recent Advisory No. 628 dated April 3, 2024, has made e-Invoicing mandatory for businesses with a turnover exceeding INR 5 crores starting from April 1, 2024.

If your turnover surpasses INR 5 crores in the fiscal year 2023-2024, it is imperative to commence e-Invoicing from the subsequent financial year, commencing April 1, 2024.

Businesses meeting the notification criteria yet not enabled on the portal can self-enable for e-Invoicing by accessing https://einvoice.gst.gov.in. They can report through any of the 4 new Invoice Registration Portals (IRPs), ranging from e-Invoice IRP 3 to e-Invoice IRP 6.

For further details, please refer to the Advisory at: Advisory No. 628

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Delhi High Court Alters Retrospective Revocation of GST Registration

editor — Thu, 28 Mar 2024 04:52:32 +0000

In the legal case of Supreme Enterprises versus Principal Commissioner of Goods and Service Tax, North Delhi, the Delhi High Court recently deliberated on the matter of retroactively canceling GST registration.

Facts of the case:

The petitioner contested an order issued on 07.07.2023, which retroactively annulled their GST registration starting from 18.01.2022. This cancellation stemmed from a show cause notice dated 06.06.2023, citing non-compliance with return filing requirements. However, the notice lacked specificity and failed to afford the petitioner adequate opportunity to respond.

The petitioner had previously sought cancellation of their GST registration multiple times due to business closure, but these requests were denied. Subsequently, they received a show cause notice lacking in detailed explanations or justifications.

The order for cancellation lacked clarity and reasoning, casting doubt on its validity. It did not sufficiently explain the grounds for cancellation or the resulting liabilities, nor did it justify the retroactive nature of the cancellation.

Held:

The court stressed that retrospective cancellation of GST registration must be grounded in objective criteria and not solely on non-compliance with return filing obligations. It recognized the significant ramifications of such cancellations for both the taxpayer and their customers, particularly concerning input tax credit.

Taking into account the petitioner’s cessation of business operations, the court amended the contested order to cancel the registration effective from the date of business closure, i.e., 26.07.2022. The petitioner was instructed to adhere to the necessary regulations outlined in Section 29 of the CGST Act, 2017.

Nevertheless, the court clarified that the authorities could still pursue steps for recovering any outstanding dues, including retrospective cancellation, in accordance with the law.

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Gross Direct Tax Revenues for FY24 Experience Notable Growth of 18.74%, net direct tax at 19.88%

editor — Wed, 20 Mar 2024 05:05:05 +0000

During the recent Budget speech, Finance Minister Nirmala Sitharaman revised the projection for direct tax collections in FY24 to Rs 19.45 lakh crore, reflecting an increase from the initial estimate of Rs 18.20 lakh crore.

Gross Direct Tax Collections:

The provisional figures indicate an impressive growth of 18.74% in gross direct tax collections for FY24 compared to the previous fiscal year. Specifically, the gross collection of Direct Taxes (before refunds) reached Rs 22,27,067 crore, a substantial rise from Rs 18,75,535 crore in the corresponding period of FY23.

Net Direct Tax Collections:

Net direct tax collections from April 1, 2023, to March 17, 2024, experienced robust growth at 19.88%. The net collections amounted to Rs 18,90,259 crore, compared to Rs 15,76,776 crore in the corresponding period of the preceding financial year.

Composition of Net Direct Tax Collection:

The net direct tax collection of Rs 18,90,259 crore includes Corporation Tax (CIT) at Rs 9,14,469 crore (net of refund) and Personal Income Tax (PIT) including Securities Transaction Tax (STT) at Rs 9,72,224 crore (net of refund).

Advance Tax Collections:

Provisional figures of total Advance Tax collections for FY24 reached Rs 9,11,534 crore as of March 17, 2024, marking a significant growth of 22.31% compared to the corresponding period of FY23. Corporation Tax (CIT) accounted for Rs 6,72,899 crore, while Personal Income Tax (PIT) contributed Rs 2,38,628 crore.

Refunds:

Refunds totaling Rs. 3,36,808 crore were issued in FY24 until March 17, 2024, reflecting a notable increase of 12.74% compared to the previous fiscal year’s refunds of Rs. 2,98,758 crore.

Source: https://www.businesstoday.in/latest/economy/story/gross-direct-tax-collections-in-fy24-grows-at-1874-net-direct-tax-at-1988-422116-2024-03-19

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CBDT Simplifies Business Reorganization ITR Filing Process for Successor Companies

editor — Thu, 14 Mar 2024 10:26:14 +0000

The Central Board of Direct Taxes (CBDT) has issued an order on March 13, 2024, under section 119 of the Income-tax Act, 1961, providing relief to successor companies involved in business reorganizations such as amalgamations, mergers, or demergers sanctioned by competent authorities such as High Courts, Tribunals, or Adjudicating Authorities as per the Insolvency and Bankruptcy Code, 2016. This order addresses situations where the reorganization orders were issued between June 1, 2016, and April 1, 2022, predating the introduction of section 170A by the Finance Act, 2022.

Entities undergoing business reorganizations have faced challenges in filing income tax returns post-reorganization, especially when orders were issued before April 1, 2022. The CBDT’s order aims to simplify this process and provide relief to such successor companies.

Background and Legal Context

The CBDT’s order is based on the judgment in Civil Appeal Nos. 9496-99 of 2019, where the Supreme Court held that successor companies could file returns considering the Scheme of Arrangement and Amalgamation sanctioned by the National Company Law Tribunal (NCLT). This judgment paved the way for successor companies to seek relief in filing their income tax returns post-reorganization.

Provisions and Relief Offered

Section 170A of the Income-tax Act, 1961, introduced by the Finance Act, 2022, allows entities to file modified income tax returns within six months from the end of the month of issuance of the reorganization order. However, this provision applies only to orders issued after April 1, 2022. For orders issued between June 1, 2016, and April 1, 2022, the CBDT’s order provides relief by allowing successor companies to furnish returns with modified particulars in accordance with the reorganization order.

Process for Filing Modified Returns

The CBDT has outlined a streamlined process for successor companies to file modified returns, taking into account the reorganization order. The entities are required to communicate with the Jurisdictional Assessing Officer (JAO) by April 30, 2024, for enablement of electronic filing of returns. The JAO will then verify whether the return is resulting from and limited to the reorganization order and enable electronic filing through the ITBA system. Taxpayers must file their returns by June 30, 2024.

The full order can be assessed at: https://www.nyca.in/wp-content/uploads/2024/03/Order-under-section-119-of-the-Income-tax-Act-1961.pdf

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