Angel tax: No coercive action, dispose of cases quickly, CBDT instructs I-T

By: and |
March 05, 2019 3:09 AM

Also, there are talks going on that the government would give relaxation to start-ups who have already had negative assessment orders.”

The assessment notices typically seek tax payers’ explanations on self-declared laibility.

Days after the government announced a raft of steps to offer relief to start-ups, many of which have got the so-called angel tax notices, the Central Board of Direct Taxes (CBDT) has sent letters to principal chief commissioners of income tax, asking them to “identify the start-up cases pertaining to them and to ensure that no coercive action is taken in these cases”.

“The income-tax commissioner (co-ordination and systems) has also been directed to request all zones to kindly ensure that appeals pending in these cases, if any, are disposed of on priority,” the letter said.

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. The total amount of tax claims in these cases, however, hadn’t been estimated, as these were generated from various zones, he had said.

The assessment notices typically seek tax payers’ explanations on self-declared laibility.

In a substantial breather to thousands of start-ups, the government on February 19 raised the cap of funding by unlisted firms or individuals in a start-up that would be exempted from the angel tax to `25 crore from `10 crore and also relaxed a clutch of rules to ease investment flow into such entities. Investments by listed companies having a net worth above `100 crore or annual turnover of `250 crore will be exempted from any such limit, which will enable them to invest more without fears of the angel tax.

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, after furore over its move to attach Delhi-based start-up TravelKhana’s bank account to recover `36 lakh, the CBDT clarified that its action was under a different provision of the Income Tax Act and not under the ‘angel tax’ provision. The case against TravelKhana was “under section 68 of the Income Tax Act on account of unexplained cash credits and not under section 56(2)(viib) on account of premium on shares, as has been alleged”, the CBDT said.

The angel tax 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 Section 56(2)(viib) of the I-T Act, the excess capital so raised is treated as income and taxed accordingly. While the section was aimed at curbing money laundering, it had troubled start-ups and their investors.

To be eligible for the relief, announced recently, 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”. The undertaking would be forwarded to the CBDT to ensure that eligible start-ups don’t get angel tax notices at all. This is crucial, as 96% of start-ups that received the notices had raised below the stipulated cap of `10 crore, according to a survey of 2,396 start-ups (that were slapped with such notices) by LocalCircles and the Indian Venture Capital Association.

Nakul Saxena, director (public policy) at iSPIRT, said the latest CBDT order is “good enough” to address concerns about the angel tax. Amit Maheshwari, partner at Ashok Maheshwary and Associates, said: “This (the order) does not ablsove the start-ups from following the process prescribed under law. You need to represent properly in appeals. Also, there are talks going on that the government would give relaxation to start-ups who have already had negative assessment orders.”

Sachin Taparia, founder and chairman of LocalCircles, said: “We have also requested the CBDT to communicate to the field officers to give due consideration to the newly-rolled out Start-up India angel tax exemption certificate in the appeal process.”

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