I made the case for taxing digital companies on the basis of gain in their valuation in Valuation Tax – If Tech Startups Can Disrupt, So Can Taxman.
Since then, I’ve heard many objections to the notion of Valuation Tax. I’m giving my rebuttals below.
- Valuation Tax is a tax on the growth in valuation, not valuation itself. To take an example, if the valuation of India’s leading food delivery app company Swiggy goes up from $2 billion to $3 billion during a year, Valuation Tax will be computed on $1B, not $3B.
- Unlike Angel Tax, Valuation Tax is not computed on the amount of money invested in a company. To continue with the above example, it’s immaterial for the purpose of arriving at Valuation Tax whether the increase in Swiggy’s valuation was driven by new fund injection of $200M or $500M.
Valuation Tax accepts valuation at face value. If some VC / PE company injected $200M in Swiggy at a post-money valuation of $3B – and not, say, $500M – that’s between the investor and Swiggy. The tax department will not get into the – futile IMO – exercise of determining whether the $3B figure is fair market value or not (which it attempted to do in the case of Angel Tax). End of the day, valuation is what the buyer pays the seller, and Valuation Tax recognizes that basic fact of business.- When investors eventually sell their stake in their portfolio companies, they pay capital gains tax on the valuation bump they get. But investors don’t sell their stake every year. Valuation Tax will be levied on the company on the year(s) when investors hold their stake whereas it will be exempted on the year in which the investors sell their stake and pay capital gains tax.
- Some may argue that, since stakeholders in a tech startup are anyway liable to pay income tax on their valuation gains, slapping a corporate tax on the company on the same amount would be tantamount to double taxation. I don’t disagree with that argument but the same logic can be used to escape corporate tax based on profits or sales or any other metric. I’m not sure the taxman is that generous!
- Valuation Tax will apply exclusively to tech startups since other industries don’t command such dizzying rises in valuations from one year to another. In other words, non-tech industries will be shielded from the tax, which resonates with its basic purpose.
https://twitter.com/realdonaldtrump/status/1154791664625606657
We can anticipate digital companies to make a huge hue-and-cry about the adverse impact of Valuation Tax but I can’t recall the last time any tax payer hailed any new tax for affecting them favorably!
