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Startups get a breather! Tax authority eases norms for pending angel tax assessments

Following through on Finance Minister Nirmala Sitharaman's Budget promises to resolve issues plaguing startups, the Central Board of Direct Taxes (CBDT) has issued a circular relaxing its assessment and scrutiny norms for such businesses. Seeking to allay concerns over angel tax, the apex body for direct taxes has assured that tax officers won't carry out any verification of issues raised with startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT).

This move is part of the procedure being laid out by the CBDT to deal with pending angel tax assessments of startups, and is aimed at easing tax compliance for such ventures. For cases that land in limited scrutiny, "no verification of such issues will be done by the assessing officers during the proceedings and the contention of such recognised start-up companies the issue will be summarily accepted", the CBDT said in a circular dated August 7. The Income Tax Department carries out two types of scrutiny procedures - limited and complete - and both entail submission of additional documents and financial reports.

It's important to stress that the relaxed norms only apply to the angel tax section. The amount raised by a startup in excess of its fair market value is deemed as income from other sources and is taxed at 30 per cent. The income tax provision Section 56 (2)(viib), which is at the root of this problem, was incorporated in the Income Tax Act in 2012 to stop unaccounted money from being funnelled into corporate world. But it ended up hitting the funding of startups, and hence the demand for abolishing this tax. Normally, about 300-400 startups receive angel funding in a year. Their investment in a unit ranges between Rs 15 lakh and Rs 4 crore.

While Sitharaman addressed the angel tax issue in her maiden budget - she also promised to resolve the issue of establishing identity of the investor and source of funds by putting in place a mechanism of e-verification - many stakeholders claim that it was not put to rest in an unambiguous manner. The CBDT circular attempts to introduce some much-needed clarity. The circular added that in case of limited scrutiny with multiple issues, or even a complete scrutiny, while an assessing officer may not go into the assessment proceedings with regard to the angel tax issue, the authority would be empowered to verify linked matters with the approval of his/her supervisory officer. Even if a startup is not recognised by the DPIIT, the assessing officers can only proceed with an inquiry after taking approval from supervisory officers.

This development should come as a breather to the startups that have been complaining about facing harassment from the taxman. According to Amit Maheshwari, Partner, Ashok Maheshwary & Associates LLP, this clarification will help startups which are facing questioning in their assessments and will also give a clear direction to assessing officers on what to do in such cases.

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