The CBDT has directed the taxman not to undertake “coercive” steps in recovering pending taxes from startups under a specific provision of the Income Tax Act, a move aimed to help budding entrepreneurs in the country. The move assumes significance as startups in the recent past had flagged their grievances to the government regarding ‘angel tax’ provision, which, they considered, was not friendly to them. The Central Board of Direct Taxes (CBDT), in a circular to all the field offices of the department, said it has come to its notice that in recent times, a specific provision (determining of fair market value of shares) of the I-T Act is being invoked in the case of startups, which had otherwise raised a genuine investment on the basis of their idea. “In view of this…no coercive measure to recover the outstanding demand would be taken,” it told the assessing officer (AO). The board directed the taxman to take necessary steps for “expeditious” disposal of appeals of such firms pending before the first appellate forum of the officer of the Commissioner (Appeals), by March 31 this year. The directive would help startups in effectively tackling the issue of ‘angle tax’ — the taxing of investments made by ‘angel’ investors in such newly raised and innovative idea-based companies.
An angel investor is one who funds a startup during its difficult times when it is taking baby steps to establish itself in the competitive market economy. These instances are dealt under section 56(2)(viib) of the I-T Act. It provides that where a closely held company issues its shares at a price which is more than its fair market value, the amount received in excess of the fair market value will be charged to tax the company as income from other sources. This taxing of ‘angle’ funds has been troubling the startups.