CBDT seeks to reassure startups on ‘angel tax’


NEW DELHI: Allaying fears related to “angel tax”, the Central Board of Direct Taxes has issued detailed guidelines that will ensure that startups that are recognised by the department for promotion of industry and internal trade won’t face any action and tax claims will not be pursued even if an assessment has been done.

“Angel tax” is levied in cases where angel investors invest in startups at a hefty premium over the book value of shares. In the past, the authorities had questioned the premium that was being paid. This was being done under Section 56(2) (vii b) of the Income Tax Act, which is an anti-abuse provision to crack down against shell companies, which have little business but are used to launder money typically by issuing shares at a premium.

Drop startups chosen for scrutiny, officers told

While the government had amended the rule and issued multiple clarifications, complaints from the startup community had not dried up, prompting CBDT to issue a “consolidated circular for the assessment of startups”.

Citing an earlier circular, the CBDT said that in cases where the startup has filled up the designated form, the company’s contention will be accepted if it has been taken up for “limited scrutiny” by the tax authorities. In any case, these assessments have to be completed by the end of the month. Similarly, officers have been told to drop startups selected for scrutiny to examine multiple issues, including “angel tax”, during the assessment proceedings. And the other issues will only be pursued after a green light from the supervisory authority. Officers have been asked to complete the assessment by October 31.

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In case a startup has not filled up the designated form despite being recognised by DPIIT, officers have been asked to seek a clearance from the supervisory authority before pursuing the case.

Further, the tax department has made it clear that all appeal cases against assessment orders passed by tax authorities will have to be disposed of by the commissioner (appeals) by the end of December. The income tax department has also decided against pushing for cases related to angel tax that are pending in the Income Tax Appellate Tribunal.

“It has been reiterated time and again by CBDT that an outstanding income tax demand relating to additions made under Section 56(2)(viib) would not be pursued and no communication in respect of the outstanding demand would be made with the startup entity. Other income tax demands would not be pursued unless the demand was confirmed by ITAT,” CBDT said in a circular issued on Friday.





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