Section 68 of the Income-Tax Act, which deals with ‘unexplained funds,’ was used to deliver the tax notices. Several firms, including some notable unicorns or those with valuations exceeding $1 billion, have received letters from the income tax authorities regarding unreported investments made between FY 2019 and 2021. The origin and source of the monies have been questioned by the tax authorities.
According to reports, the Income Tax Department has issued warnings to several firms, including some with unicorn valuations ($1 billion or more). A response to the notices has been requested regarding the nature and origin of a few unexplained investments made between FY19 and FY21. The Income Tax Department is reportedly questioning investments of $100 crore and more.
Every investment worth $100 billion or more is being looked into. However, it was impossible to verify the entire corpus. According to a story in the Business Standard, the tax notices were issued under Section 68 of the Income-Tax Act, which deals with unaccounted-for funds that are credited to taxpayers’ books but for which the source is not specified. The Section is mostly used to check the legitimacy, creditworthiness, and identity of share issuances.
Some of these notices questioned the local holdings of the foreign investors, the valuation that was made, and the goal of the loan that the investors had taken out.
“An explanation is being sought, considering the growing menace of round-tripping of funds, the reason for which the angel tax provision has been extended to non-resident investors,” the financial daily quoted an unnamed official as saying.
According to the official, the negative list of the angel tax has been established while considering the regulatory framework. Due to their status as regulated organizations, sovereign wealth funds, pension funds, and portfolio investors registered with the Sebi from 21 jurisdictions will be immune from the terms of the angel tax.
The newspaper claimed to have heard from private equity and venture capital (PE/VC) groups about the government’s request to loosen the rules for angel investors, citing unnamed sources. For instance, it was suggested to include convertible bonds in the draft regulations, which now only exclude stocks from price matching and the 10% safe harbor.
Lalit Kumar, partner, J Sagar Associates, told the daily: “This proposal, although it primarily relates to tax, could have a bearing on foreign investment deals under forex rules. Inbound private equity transactions generally use convertible securities such as compulsorily convertible preference shares with a conversion ratio. If these securities are issued at a price higher than their valuation price, the difference between the two will be subject to angel tax.”
