Respite for Startups from Angel Tax. CBDT says -Focus on innovation and improvement of existing products, services and processes and generate employment.   Forget the Taxman !!

Further through the promise made by our Hon’ble Finance Minister Nirmala Sitharaman’s on July 5th, 2019 to resolve the issues hovering around startups, CBDT has issued a circular Circular No 16/2019” easing out the anxiety of the startups by relaxing its assessment and scrutiny norms.

From the impending concerns over Angel Tax to easing out the tax compliance for such startups, the CBDT has assured through a circular that tax officers won’t carry out any verification of issues pertaining to startups which are recognized by the Department for Promotion of Industry and Internal Trade (DPIIT).

Angel Tax

What is Angel Tax? How did this arise?

Angel tax is a tax which is levied when a private company or a startup raises funds at a rate higher than its fair value of shares.

The amount raised by a startup in excess of its fair market value is deemed as income from other sources and is taxed at 30 percent+plus SC and cess as applicable. The income tax provision Section 56(2)(viib), which is at the root of this problem, was incorporated in the Income Tax Act in 2012 to stop the unaccounted money from being funneled into the corporate world. The move seeks to ensure that genuine entrepreneurs are not affected by the provision that allows the government to demand tax on share premium, treating it as income under the aforementioned section.

While our Hon’ble FM addressed this angel tax issue in her maiden budget – she also promised to resolve the issue of establishing the identity of the investor and source of funds by putting in place a mechanism of e-verification.

The CBDT circular attempts to introduce some much-needed clarity:

LIMITED SCRUTINY + SINGLE ISSUE + RECOGNISED

  • Where the Startup Company has been recognized by the DPIIT but the case is selected under “limited scrutiny on the single issue of applicability of section 56 (2)(viib), no verification on such issues will be done by the AOs during the proceedings u/s 143 (3)/147 of the I.T. Act, 1961 and the contention of such recognized Startup Companies on the issue will be summarily accepted.

COMPLETE SCRUTINY + MULTIPLE ISSUES + RECOGNISED

  • Where the Startup Company has been recognized by the DPIIT but the case is selected under “limited scrutiny” with multiple issues or under “complete scrutiny” including the issue u/s 56(2)(viib), the issue of applicability of section 56 (2)(viib) will not be pursued during the assessment proceedings and inquiry or verification with regard to other issues in such cases shall be carried out by the Assessing Officer, only after obtaining approval of his/her supervisory officer. Due procedure as per Income Tax Act shall be followed with regard to other issues for which the case has been selected.
  • Where the Startup Company has not got DPIIT approval and the case is selected for scrutiny, inter alia on the grounds of applicability of section 56(2)(viib) or any other issues, then also inquiry or verification in such cases shall be carried out by the Assessing Officer, as per due procedure, only after obtaining approval of his/her supervisory officer.

Earlier, the Central Board of Direct Taxes (CBDT) had only exempted registered startups from the purview of the angel tax provision except for those that have already received tax demand notices with the intent of granting them relief at the appellate stage. However, a clarification to this effect on Saturday has cleared the air that it is also applicable to those that have already been issued a demand notice for the share premium or the Angel Tax.

As of July, 19,665 startups are recognized by the DPIIT, and more than 540 startups have received an exemption from angel tax.

Author Bio

Name: Himanshu
Qualification: CA in Practice
Company: AK Nair & Co./ NBC Consultants LLP
Location: New Delhi, New Delhi, IN
Member Since: 21 Feb 2018 | Total Posts: 4

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