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).
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
COMPLETE SCRUTINY + MULTIPLE ISSUES + RECOGNISED
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.