Taxman looks at startup valuations via rarely-used provision
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Synopsis
Startups that, despite losing money, sell stocks at steep premiums based on growth projections, being asked to explain valuations
ETtech
Many startups are being asked to explain their ambitious valuations by tax authorities.
Despite losing money, such closely-held businesses often sell stocks to investors at steep premiums based on growth projections. However, they may find themselves vulnerable before the taxman if the business projections go haywire or assumptions that go into pricing of shares and valuing a company appear unrealistic.
In recent months, the tax department has questioned the valuation of several startups by invoking a sparingly used feature of the law that empowers the principal commissioner or commissioner to revise the order passed by the assessing officer.