IT department has sought more information regarding tax-payers as per its 2018-19 directives than previously sought.
This rising disclosure requirements subject taxpayers to unnecessary burden and enhance compliance costs.
What is the new demand?
While start-up investors are already worried over ‘angel tax’ on equity infusions, Central Board of Direct Taxes (CBDT) has presented another googly.
Billions of dollars in angel funding have flowed into Indian start-ups lately.
As each venture receives successive rounds of funding, incumbent investors get to pocket substantial capital gains on exit.
This information is often hidden from the public domain, and is now being demanded by the IT department.
Individual investors will now have to disclose the excesses that are received from the sale of unquoted shares over and above their ‘fair market value’.
Such a disclose will allow the taxman to not just levy tax on the specific investor, but also to cross-verify valuation claims across investors in a venture.
This would hence ensure a consistent basis of valuation over time.
What is the major issue with this?
Fair Market Value even for listed entities is very subjective, and yield depends on the method of calculation, market conditions and investor sentiments.
In the absence of profits or tangible assets, the valuation of new-age start-ups is an even more qualitative exercise.
Hence, the disclosure requirements would open up a Pandora’s Box of discretionary assessments and disputed claims between taxmen and investors.
If the Centre is keen to provide impetus to start-up funding, it should ideally refrain from prescribing valuation methods and leave it to the markets.
What are the other issues?
In addition to this, high-income salaried people have been mandated to provide their salary breakup and give details on property, and investments.
Contrary to the stated purpose of moving to simpler tax filings, the CBDT has demanded more and more intrusive details from taxpayers.
While the IT department already collects a lot of data at source (from banks, TDS facilitators etc…), it is surprising that those aren’t being put to use.
Subjecting the entire taxpaying population to a rising compliance burden to crack down on a few bad apples is anything but a friendly tax regime.
