Doing business was never so dangerous in India. We have intentionally used the word ‘dangerous’. Through, every entrepreneur know what it takes to start business from a Scratch, still there are problems which no one thought’s off. A very recently created problem which can be so impactful that even can disrupt the business fully or even can affect the going concern status of the business. Let us now decode this very new unique problem created by the income tax authorities in India.
A Limited (Name changed) is having an ecommerce business with a revenue of around 95 crore. A Limited is an Indian company fully controlled by a company in Singapore (now a day’s very usual trend to form a company outside India to raise funds). His website and the business were having a fantastic run and due to this, they raise an investment in Singapore Company. After raising their first round investment, they invest the same into India at Rs.1500 per share; however the fair Market value was Rs.3500 per share at that time.
Everything was going smoothly until A Limited receives the notice from the Income tax department, and what was written in the notice makes the reader almost blank and also gave a 440 volt shock to the founder.
The notice states that “after all the analysis and after gathering all the information and evidences, it has been concluded that the difference between the money you rasied and the money you supposed to raise will be treated as income in your hands.”In short, the company has raised 200 crore, company could raise 350 crores (as per fair market value of shares), now the difference will be treated as income in the hands of the company.
Shocked! Yes, everybody who was present at that particular time was stunned by the notice. The money, which was neither the income of the company nor they have received it, has been charged to tax by the income tax department that too with interest and penalty. No one can imagine that any amount which wasn’t received, which was never earned can be charged to tax in India. And ultimately, dispute arises and company is now fighting a suit of Rs. 450 crores (including Interest and penalty) which was actually more than the net worth of the company.
So, is there any solution?
Here‘s the Vodafone again for you!
The above same facts were also present in Vodafone India case, the case which every start up should not only read but also incorporate this case into the financial planning of the company. Vodafone was also charged with the huge 3500 crore tax demand, which Vodafone disputed into the High Court and win the case.
Now, you understand why we have used the word ‘dangerous’ when it comes to doing business in India. Even the world ranked India 179 out 189 countries when it comes to doing business in India, however, it is even tougher then world suggests (stated by Business standard). Therefore, it is now very much important for every start up to consult a chartered accountant before formulating or doing any business transaction, because no one knows what might come in future and take away all the hard work in a minute.
So, in the end, it is recommended for all start ups to plan properly, consult a professional especially a tax expert, implement accordingly and go and win the world.
Author, is a professional and handles Taxation matters, which happens to be his core competency and also a founder of www.quickcompany.in
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BY PARAS MEHRA