START-UP’s BEWARE OF VODAFONE!
Mr Ashish Ranjan, developer, started his business in Hong Kong. Since he was good at marketing, his business soon started generating profits. Ashish, through his Hong Kong Company expands his business in India and incorporates a company which is fully controlled by Hong Kong Company. Ashish, because his business was doing well, was approached by many investors. Then after being approached by many investors, he finds one of the offers very lucrative, so he sold off his Hong Kong Company to the investor for US $ 20 Million.
Income tax department issued a notice to Ashish stating that you had earned a taxable income and you haven’t paid any taxes, so department slaps Ashish with a tax demand of over US$16 million (including penalty and interest). So Ashish unnecessarily lost his 80% of the earned income. That’s really rude.
The main reason behind this was that in India, this kind of transaction is treated as indirect transfer and is liable to tax in India. This is what happened in case of Vodafone and after that, Vodafone was slapped with a tax demand of over 20,000 crores.
According to the research, around 8 out of 10 start ups prefer to sell their business as same as Ashish had done in the aforesaid case. But the problem is, 4 out of 8 start-ups lose their substantial income due to legal failure like in case of Ashish. So start-up always beware before you commit any transaction because you never know what your transaction may lead you too.
Is their any remedy available against this type of traps? Yes there is!
With proper planning before you commit any transaction can save you a few million dollars. Do remember, “Your start-up may not to be perfect but it has to be legally perfect”.
If the foreign company, which is being transferred, does not derive his value by more than 50% from the Indian company, then it shall not be treated as transfer in the eyes of law. It has been recently held by the High court.
So, build your base first hire a professional, take care of your legal part seriously, go and win the world!
By Paras Mehra
Tags Income Tax