Budget 2019: Income tax should not enquire startups for angel tax without approval, says Nirmala Sitharaman

Budget 2019-20: Announcing ease in regulatory requirements for startups, finance minister Nirmala Sitharaman today in her budget speech said that the funds raised by startups will not require any kind of scrutiny of the Income Tax department following the requisite declaration and information provided.

The move comes as a great relief for startups that have been subjected to heavy scrutiny with respect to the angel investment raised for growing their business at its early stage.

“The issue of establishing the identity of investor and source of his funds will be resolved by putting in place a mechanism of verification so that there is no man-to-man interface there,” the minister said.

The minister said that the “IT department should not conduct any enquiry without obtaining approval of a supervisory officer.” The minister further said that a “special administration arrangement” also shall be made by the Central Board of Direct Taxes for pending assessments of startups and redressal of their grievances.

The need for startups to justify the fair market value of their shares issued to category one AIF, which was quashed by the government earlier this year, is also extended to AIF category two funds. “The valuation of shares issued to these funds will be beyond the scope of IT scrutiny,” the minister said.

Nirmala Sitharaman also extended “the period of exemption of capital gains arising from sales of residential house for investment in startups up to 31st March 2021 and relax other conditions of this extension.”

672 startups were given exemption with respect to investments under section 56(2)(viib) of the Income-tax act 1961 aka angel tax by CBDT as tweeted by DPIIT citing its secretary Ramesh Abhishek.

Angel tax was introduced by the then Finance Minister Pranab Mukherjee in the 2012-13 budget to check money laundering to be levied on startups that have capital in exchange of equity shares at a price over and above the fair valuation of the shares sold even as the premium has to be being paid by investors considered as income and hence has been called as angel tax as the amount taxed is usually on angel investment in startups.