Companies faced with a 30% tax bill over valuation premiums are set to get a reprieve after a recent government clarification asked officials not to scrutinise such transactions, said people with knowledge of the matter, adding that this could also bring some relief to startups on the angel tax front.

Many firms had received tax demands after premiums were paid over the ‘fair price’ or ‘fair market value’ for fresh equity or preference shares. The demands could be withdrawn in the coming weeks, said the persons. A December 31 government notification has said that fresh issuance of shares at a premium, in most cases, should be outside the tax ambit.

“The clarification would positively impact all situations where valuations were challenged by the taxman for fresh issuance of shares,” said Deloitte India partner Rajesh H Gandhi. “The revenue department will have to withdraw the tax demands as the circulars are binding on the tax department, except in cases where litigation is on and the case is pending before the courts.”

ET had on December 22 and December 26 reported that the revenue department had issued notices and then raised tax demands that could run into hundreds of crores of rupees in deals where premiums were paid. Companies were asked to cough up 30% tax on the differential over and above the fair market value derived by tax department. The department had issued notices in December last year followed by demands under two income tax sections — 56(2) and 68. Both deal with taxing premiums by investors in a deal.

Section 56(2) specifically covers the issue of shares while Section 68 deals with unexplained cash credits, experts said. Gandhi said demands raised under Section 68 will not benefit from the relaxation.

Experts said tax regulations had been modified in 2010 to prevent money laundering. The clarification is a recognition that such valuation premiums can be legitimate.

“The intention of bringing this section in the Income Tax Act, 1961, was to prevent the transfer of shares at substantially less value done with the intention to facilitate conversion of black money,” said Amit Maheshwari, partner, Ashok Maheshwary and Associates LLP.

“The intended consequence of this provision was that it could have been invoked even in case of fresh issue of shares.”

Several startups could also benefit in the angel tax issue, experts said. While the clarification doesn’t specifically deal with the income tax law used to tax premiums involving startups, the logic could be extended to them.

The angel tax controversy is related to valuations derived by the startups during successive rounds of funding. In several cases, revenues at startups have dropped or remained stagnant but valuations have increased.

Startups have argued that this model is unique to the ecosystem. The taxman has, however, questioned the premiums paid by investors and wants to categorise them as income that would be taxable at 30%. In most cases, investments made by angel investors, venture capital funds or others have been challenged by the taxman.

Since the government has signified its intent for the provision, the same logic or clarification should also apply to section used for slapping angel tax,” said Maheshwari.

Startups have continued getting tax demands under the angel tax despite government assurances.

ET reported on January 1 that the latest notices issued in the last week of December specified the exact amount startups are required to pay, along with the tax calculation.

Startups have continued getting tax demands under the angel tax despite government assurances