Early stage investors provide funding to start-ups based on the potential of the business even when some of them don't resemble a traditional company with cash flows.
The Central Board of Direct Taxes (CBDT) On Wednesday gave effect to the conditional relief from angel tax to start-ups as notified by the Department for Promotion of Industry and Internal Trade (DPIIT) on February 19 by making the necessary changes in the Income Tax Act.
In a substantial breather to thousands of start-ups, the DPIIT had raised the cap of funding by unlisted firms or individuals in a start-up that would be exempted from the angel tax to Rs 25 crore from Rs 10 crore and also relaxed a clutch of rules to ease investment flow into these. Investments by listed firms having a net worth above Rs 100 crore or annual turnover of Rs 250 crore will be exempted from any such limit, which will enable them to invest more without fears of the angel tax.
As FE reported earlier, the CBDT has also sent letters to principal chief commissioners of I-T recently, asking them to “identify the start-up cases pertaining to them and to ensure that no coercive action is taken in these cases”.
While analysts feel the latest CBDT missive is a positive step, some of them say any tax notices to start-ups must be clear on the provision under which these are issued.
Recently, CBDT member Akhilesh Ranjan said since most of the hundreds of assessment notices sent to start-ups were merely assessment ones, they would be quashed. However, in about 100 cases, where tax demand was already raised through such notices, the appeal process would be fast-tracked.
However, some concerns stil remain. While the government has assured that the first appeals forum of I-T department would prioritise start-ups who have received tax demands, this doesn’t address the concern that funding raised by them might still be judged on the conventional accounting tools like book value or discounted cash flow method.
Early stage investors provide funding to start-ups based on the potential of the business even when some of them don’t resemble a traditional company with cash flows, experts said. When a tax official examines the books of such a company, the funding raised might appear to be highly disproportionate to its assets and this might lead to suspicion of possible money laundering.
Subramaniam Krishnan, partner – private equity tax, EY India, said: “The conditions provided for availing the exemption for start-ups may be limiting as they relate to restrictions on investing in shares and securities or making capital contributions for a seven year period after raising capital from investors. The notifications also do not address the concerns of start-ups that are challenging tax demands already raised by the revenue department.”