In what would bring clarity to the start-ups that have been served with notices by the income-tax department under the so-called angel tax provision, the Central Board of Direct Taxes on Thursday said the department would ‘summarily accept’ contention of start-ups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT), if the notices pertained only to the angel tax section.
The angel tax, under Section 56(2)(viib) of the Income Tax Act, 1961, is typically an impost on the extra capital raised by an unlisted firm through the issue of shares over and above their fair market value . According to the Act, the excess capital so raised is treated as income and taxed accordingly. While the section is primarily aimed at curbing money laundering, it had troubled start-ups and their investors.
Further, the Board said that those DPIIT-recognised start-ups which have received notices related to multiple issues including the angel tax, the issue of applicability of angel tax will not be pursued during the assessment proceedings. The assessing officer (AO) will conduct inquiries and verification into other issues only after obtaining approval of the supervisory officer.
As for the third category of notices, which were served on start-ups not recognised by DPIIT and are concerned with multiple sections of the law including angel tax, the AO will proceed only after a nod from supervisory officer, the CBDT said.
“While the recognised start-ups stand relieved, the ones that are yet to receive a nod from the DPIIT may still have to face the inquiry, and the procedure to be followed by the tax officers in such cases would be crucial to note,” Rakesh Nangia, managing partner at Nangia Advisors(Andersen Global), said.
In June, the government had said that 672 start-ups had been issued letters of exemption from angel tax. To be eligible for relief, start-ups have to register with DPIIT and submit an undertaking, saying they are not investing in specified segments that are usually suspected to be used for money laundering unless these investments are made “in the ordinary course of business”.
For instance, these start-ups can’t invest in realty; loans and advances; shares and securities; a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds Rs 10 lakh and jewellery, etc. However, if a start-up’s usual business model involves investment in jewellery (jewellery start-ups, for example), it can invest in it.
As many as 16,116 start-ups are already registered with DPIIT and many more are now expected to get registered. Earlier this year, the government had relaxed norms for start-ups to be exempted from angel tax by raising the funding cap by unlisted firms or individuals in a start-up to Rs 25 crore from Rs 10 crore. Further, investments by listed companies having a net worth above Rs 100 crore or annual turnover of Rs 250 crore were also exempt from tax.
However, while these measures provided protection from future income tax notices, the clarity on the fate of start-ups that had already come under the department’s radar was missing.
“This clarification will help start-ups, which are facing questioning in their assessments and will also give a clear direction to assessing officers on what to do in such cases,” Amit Maheshwari, partner at Ashok Maheshwary & Associates said.
