Attention startups: No angel tax, other compliance measures; all you need to know in a nutshell

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Updated: September 2, 2019 9:59:44 PM

There have been a number of measures announced this year by the government, particularly in this year’s budget focusing on solving the controversial angel tax, reducing tax scrutiny on funds raised by startups, e-verification of investors and source of funds etc.

Tax holiday for startups, startups turnover limit for tax holiday, CBDT clarification on startup tax holiday, tax department, section 80 IAC, Modi GovtCBDT had recently notified setting up of a five-member cell for startups to address their grievances pertaining to the angel tax.

Even as the Modi government has been engaging with the startup community from quite some time to work upon ways to boost ease of doing business and curb taxes imposed on startups, there have been a number of measures announced this year by the government, particularly in this year’s budget focusing on solving the controversial angel tax aka section 56(2)(viib) of the income tax act, reducing tax scrutiny on funds raised by startups, e-verification of investors and source of funds, extending exemption period of capital gains from the sale of house for investing in startups etc. To implement these announcements, the Central Board of Direct Taxes (CBDT) had issued multiple clarifications assuaging startups’ concerns and confusion around proposed regulations even as the Finance Minister Nirmala Sitharaman had said in her budget speech that “startups in India are taking firm roots and their continued growth needs to be encouraged.” In order to help startups with all compliances announced in various such clarifications or circulars, CBDT on Monday consolidated all of them.

  • CBDT on August 7 had issued a circular saying that DPIIT recognised startups “selected under ‘limited scrutiny’ with multiple issues or under ‘complete scrutiny’ including the issue u/s 56(2)(viib)” also known as Angel tax, would not face inquiry by the AO without approval of the supervisory officer.
  • The board had said that there have been instances of notices being sent under Section 143(2)/147 by AOs to startups before the DPIIT notification since February 19 this year that are currently pending for disposal. The circular also said that for even unrecognised startups “selected for scrutiny, inter alia on the grounds of applicability of section 56(2)(viib) or any other issue/s,” then too inquiry shall be carried by AO after the approval.
  • The time limit for completing pending startup assessments was also specified by CBDT. Assessments pending due to “limited scrutiny” were to be completed preferably by 30th September 2019. The other cases of startups were to be settled on priority preferably by 31st October 2019.
  • Angel tax provisions would not apply for startups assessments made before February 19, 2019, provided a DPIIT-recognised startup had filed a declaration in Form No. 2.
  • Outstanding income-tax demand pertaining to additions made under section 56(2)(viib) would not be made and also no communication for such outstanding demand would be sent to startups.
  • Other income-tax demand by the tax department of startups would not be made unless the Income Tax Appellate Tribunal confirms the demand.
  • CBDT notified setting up of a five-member cell for startups to address their grievances pertaining to the angel tax and other tax concerns. The cell will be headed by the member (Income Tax and Computerisation) of the Board.

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