With the FIFA World Cup 2018 unfolding so many surprises, football fever has certainly reached a crescendo in India, having caught the attention of many in a nation where football may have otherwise been considered dormant some time ago. Moving to the tax and finance arena, another term which may have caught one’s attention in recent months is the term “value” (owing to, among others, recent acquisitions which have made history), and more specifically, the value of an unlisted equity share.
But what does the term “value” or “valuation” signify in the tax world? The quantification of the worth of the shares or its underlying business has become a topic of interest amongst regulators and tax authorities alike, with a renewed thrust on ensuring that Indian assets are given their fair share in terms of value and any taxes/ stamp duties payable on transfer of such assets are appropriately discharged.
A topic which is not new to the provisions of the Indian Income-tax Act, 1961 (the Act), the concept of valuation has evolved over time in terms of its scope and applicability, with its utility arising in transfer pricing, indirect transfer, gift/ transfer/ buy-back of shares, issuance of ESOPs, transfer of property deviating from stamp duty value, etc.
But after all is said and done (or bought and sold), the key provisions which have a wider applicability, in terms of their applicability and scope, are the provisions of section 56(2)(viia) [now 56(2)(x) ] and 56(2)(viib) of the Act. These provisions continue to be the focal point of discussions for the tax authorities and have been briefly elaborated below:
*Illustrative requirements: Start-up should be incorporated in last seven years, approved by an inter-ministerial panel and certified by a government body / listed with an approved incubator, turnover of less than INR25 crore, etc. Reported average income of at least INR25 lakh for preceding three years net worth of INR2 crore in preceding FY
Clearly, the buzz around “valuation” is here to stay and as the above graphic would suggest, the valuation of unquoted equity shares, although having evolved over time, is still not free from alternative, albeit plausible, interpretations and one can expect more clarifications to further streamline the matter in the near future.
Till then, with the field set and full of many crucial aspects for an otherwise simple-appearing term, there’s no doubt that taxpayers today have to juggle various regulations like no other to score the “goal” they’ve targeted without committing any “fouls” in the form of non-compliances.
The author of the blog is Manoj Rathi, Senior Manager, Direct Tax, EY India