Relief for startup ecosystem: Angel tax recoveries put on hold

By: |
Updated: December 21, 2018 7:05:19 AM

Start-ups enjoy income tax benefit for any consecutive three years out of first seven assessment years. However, they have to approach an eight-member inter-ministerial board of certification to avail of the concession.

Relief for now! Angel tax recoveries on hold

Amid widespread concerns over ‘angel tax’ notices being slapped on start-ups, the Central Board of Direct Taxes (CBDT) in the finance ministry has asked field officials to desist from taking any coercive action or recovery of demands of completed assessments from these firms till a policy decision is taken.

The department of industrial policy and promotion (DIPP) would soon constitute a committee of experts drawn from reputed institutions like IITs and IIMs to consider grant of tax exemptions to start-ups, and the issue of premiums among other related matters, sources said.

The committee will also make recommendations on individual cases of recognised start-ups.

The move follows a high-level meeting held by the revenue secretary Ajay Bhushan Pandey with secretary, DIPP, Ramesh Abhishek and CBDT chairman Sushil Chandra on Thursday wherein the difficulties faced by start-ups in the wake of a flurry of tax notices were discussed.

These notices consider the value of funding received by start-ups, which is over and above the enterprise value, as ‘income from other sources’ and hence taxable. However, while the tax man looks at traditional methods like discounted cash flows for estimating the value of a company, entrepreneurs say this method is redundant and outdated in new areas, especially start-ups operating in the technology space.

Section 56 of the Income Tax Act says that where a closely held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be charged to tax as ‘income from other sources’.

Start-ups enjoy income tax benefit for any consecutive three years out of first seven assessment years. However, they have to approach an eight-member inter-ministerial board of certification to avail of the concession.

With no let-up on the trend of notices being sent to start-ups over so-called ‘angel tax,’ the commerce and industry minister Suresh Prabhu on Wednesday tweeted that he has taken due cognizance of the issue.

In April, the government had granted relief to eligible start-ups from the angel tax provided they have received funds up to a certain limit, seeking to address a major concern of budding entrepreneurs. The DIPP had said start-ups could apply to an eight-member inter-ministerial board (IMB) for the tax relief if “the aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of shares does not exceed Rs 10 crore”.

However, some of the rules for registering as start-ups have proven to be tedious; the definitions are also seen to be subjective since, for instance, a start-up has to be ‘innovative.’

DIPP also laid down rules for angel investors saying that the investor who proposed to subscribe to start-up shares must have an average returned income of Rs 25 lakh or more for the preceding three financial years or the net worth of Rs 2 crore and above as on the last date of the preceding fiscal.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

FinancialExpress_1x1_Imp_Desktop