Angel Tax: New rules to benefit hundreds of start-ups facing income tax inquiry

Start-up India: New rules will ease the problem of those start-ups against whom a tax demand already was pending before the issue of DPIIT notification in February this year.

start ups, angel tax, finance minister, nirmala sitharaman
The Union government relaxed angel tax related rules to help start-ups.

Angel Tax: More than a month after the presentation of this year’s Union budget, the finance ministry has issued new guidelines and amended Para-6 of DPIIT’s notification issued on February 19, to prevent the harassment of start-ups at the hands of tax authorities. These new rules will help those start-ups that have been facing income tax inquiries for receiving investment from angel investors. In her maiden budget speech, finance minister Nirmala Sitharaman had last month announced a slew of relaxations for the start-ups and promised that tax authorities will not go after them. However, the move did not benefit those start-ups against whom a demand order was already pending before the issue of DPIIT’s notification in February this year. But this time the Centre not only relaxed the criteria for closing the cases under scrutiny but it also amended conditions mentioned in the Para-6 of DPIIT notification dated February 19, covering even those cases where assessment order was passed before February.

“It is heartening to see that CBDT has announced relief from Section 56(2)viib for startups with pending demand orders”, said Sachin Taparia, Founder & Chairman of LocalCircles, a community platform which worked closely with the Government and other stakeholders to resolve the issue of angel tax on start-ups.

Start-ups have complained to the Union government that despite finance minister Nirmala Sitharaman’s budget announcement, there was no let up in the inquiry against them by the income tax department for receiving funds from angel investors. The primary reason for the continued inquiry in these cases was the wording and expression of the Para-6 of the DPIIT notification dated February 19. The said notification excluded those start-ups from the relaxed criteria where funds received from Angel investors have already been added in the assessment order before the issue of the DPIIT notification in February.

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The imposition of tax on start-ups for receiving funds from venture capital companies and funds was also raised by the opposition parties in the run-up to the Lok Sabha elections held in April-May this year. It prompted the Union government to issue notification on February 19 but it excluded those start-ups where a tax demand was already pending for receiving funds in FY 2016-17 and later.

Now the central government’s decision to amend the Para-6 of the DPIIT notification will enable those start-ups against whom a demand order was already pending or whose cases were pending before the appellate tribunal.
“One can say that with this big issue behind us, startups can now focus on other smaller bottlenecks, raising capital and growth”, Sachin Taparia told Financial Express Online.

In addition to amending the Para 6 of the DPIIT’s notification, the Union government has also decided that if a start-up that has been recognised by the Department of Industry and Internal Trade (DPIIT), is under the limited scrutiny of the Income Tax Department on the issue of applicability of section 56(2) (viib), then the department will straightaway accept its contention it the start-up has filed the Form number 2.

This change will make the life of those entrepreneurs easy that were under the probe of Income Tax department only for a single issue with regard to applicability of section 56 (2) (viib).

In such cases, most of the time, the department will not proceed with the probe.

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In other cases, those DPIIT recognised start-ups that have been facing scrutiny for the applicability of section 56(2) (viib) for multiple issues but they have filed Form No. 2 then their matter will not be pursued further during the assessment proceedings. In such cases, inquiry on other issues will only be carried out by the concerned officer after obtaining the approval from the supervising authority.

The third category where the Union government has made relaxation is of those DPIIT recognised start-ups that have been under inquiry but have not filed Form No. 2. Even in these cases, the assessing officer will not proceed with the inquiry without the approval of his supervising officer.

The new rules announced on Saturday are aimed at allaying the concerns of entrepreneurs and start-ups as their role is considered crucial in economic development and job creation.

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First published on: 11-08-2019 at 16:00 IST
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