CBDT issues detailed guidelines for startups on angel tax
- CBDT notified the creation of a five-member special cell to address the grievances of startups related to angel tax
- Angel tax is levied in cases where angel investors invest in startups at a hefty premium over the book value of shares
New Delhi: The Central Board of Direct Taxes (CBDT) has issued detailed guidelines for startups in order to allay fears related to angel tax. These guidelines are aimed to ensure that the startups that are recognised by the department for the promotion of industry and internal trade (DPIIT) will not face any action. Also, tax claims will not be pursued even if the assessment has been done.
It may be noted that the angel tax is levied in cases where angel investors invest in startups at a hefty premium over the book value of shares. Earlier, under section 56(2) (vii b) of the Income Tax Act, the authorities have asked questions about the premium that was being paid. It was an anti-abuse provision in order to crack down against shell companies, which have little business but are used to launder money typically by issuing shares at a premium, according to a news report in the national daily.
Last week on Friday, the CBDT notified the creation of a five-member special cell to address the grievances of startups related to angel tax and other tax-related issues.
According to the order issued by the CBDT, the ‘startup cell’ will be headed by the member (Income Tax and Computerisation) of the board.
However, the government had issued multiple clarifications and amended the rules, but the complaints from the startups had not dried up. This prompted the CBDT to issue a consolidated circular for the assessment of startups.
According to an earlier circular, the CBDT stated that in the cases where the startups have filled the designated form, the contention of the company will be accepted if it has been taken up for limited scrutiny by the tax authorities. These assessments have to be completed by the end of the month, in any case.
In any case, these assessments have to be completed by the end of the month. Similarly, officers have been told to drop startups selected for scrutiny to examine multiple issues, including “angel tax”, during the assessment proceedings. And the other issues will only be pursued after a green light from the supervisory authority. Officers have been asked to complete the assessment by October 31.
However, if the startup has not filled the designated form even after recognized by DPIIT, officers have asked to seek clearance from the supervisory authority before pursuing the case.
Moreover, the tax department has clarified that all appeal cases against assessment orders passed by tax authorities will have to be disposed of by the commissioner (appeals) by the end of December. The I-T department has also decided against pushing for cases related to angel tax that are pending in the Income Tax Appellate Tribunal (ITAT).
“It has been reiterated time and again by CBDT that an outstanding income tax demand relating to additions made under Section 56(2)(vii b) would not be pursued and no communication in respect of the outstanding demand would be made with the startup entity. Other income tax demands would not be pursued unless the demand was confirmed by ITAT,” CBDT said in a circular issued on Friday.
Last month Finance Minister Nirmala Sitharaman said, “To mitigate genuine difficulties of startups and their investors, it has been decided that section 56(2)(vii b) of the Income-Tax Act shall not be applicable to a startup registered with DPIIT.”