Forget about angel tax, and focus on business: CBDT chief to startups

The country’s startup community should now not worry about taxmen and concentrate on their businesses as concerns related to ‘angel tax’ have been “sorted out”, the Central Board of Direct Taxes (CBDT) chief said on Saturday.

CBDT Chairman PC Mody said all “legacy issues” related to startups would be resolved through a consultative process and under the strict supervision of senior officers of the tax authority.

Angel Tax

In her maiden Budget speech on Friday, Union Finance Minister Nirmala Sitharamanproposed a slew of measures to resolve problems being faced by startups with regard to their initial fundingangel tax, their certification, and verification of investors.

The CBDT boss said, “I am very happy to say that all issues which were there with the DIPP… we have had extensive deliberations between both the departments and we have resolved all issues related to startups.”

The Department of Industrial Policy and Promotion (DIPP) is now called Department for Promotion of Industry and Internal Trade (DPIIT). The DPIIT, under the commerce and industry ministry, deals with foreign direct investment and issues related to startups.

No cause for concern

“The issues resolved are with regard to the definition of startups, with regard to the issue of valuation of shares, and with regard to sources of funds,” Mody said. “Now, I think everything has been sorted out and there should not be any cause for concern for startups.”

“As the head of the tax family, I can definitely assure startups that there would not be any occasion for them to agitate or have any misgivings. They can just concentrate on doing their business,” he added.

The CBDT is the policy-making body for the Income-Tax Department.

Asked what “administrative arrangements” his department would make in this context, as announced by Sitharaman, Mody said this statement of the finance minister was with respect to “legacy issues”.

“Like in certain cases where scrutiny (of a startup) had already commenced or the notices were already issued, there we propose to have dedicated officers carrying out the scrutiny; that would also be done in consultation and prior approval of supervisory officers,” he said.

“So, when there is involvement of senior officers and there is more of a consultative process, I do not anticipate that there would be any issue left that would trouble or agitate startups,” the CBDT chief added.

Sitharaman had stated that it would be ensured that no inquiry or verification in such cases be carried out by the assessing officer without approval of the supervisory officer.

Several startups have been complaining and making representations to the government for about a year with regard to receiving I-T notices. They claimed it was getting difficult for them to operate when the taxman was breathing down their neck.

Spotlight on startups

Sitharaman, in her Budget speech, said startups in India were taking firm roots and their continued growth needed to be encouraged.

“To resolve the so-called ‘angel tax’ issue, startups and their investorswho file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums,” she had said.

The issue of establishing the identity of the investor and source of his/her funds will be resolved by putting in place a mechanism for e-verification, she had said. With this, funds raised by startups would not require any kind of scrutiny from the I-T department, the minister said.

The finance minister had also proposed relaxing certain conditions for carrying forward and set-off of losses.

Normally, about 300-400 startups get angel funding in a year. Their investment in a unit ranges between Rs 15 lakh and Rs 4 crore. After claims by several startups that they were receiving tax notices under section 56(2)(viib) of the Income Tax Act, 1961, to pay taxes on angel funds received by them, the DPIIT, in consultation with the CBDT, sat down to resolve the issue.

Section 56(2)(viib) of the I-T Act provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and taxed at 30 percent. Touted as an anti-abuse measure, this section was introduced in 2012. It is dubbed as angel tax due to its impact on investments made by angel investors in startup ventures.

The government launched the Startup India initiative on January 16, 2016, to build a strong ecosystem for nurturing innovation and entrepreneurship. It also provided startups with certain tax benefits and other incentives.

So far, 19,665 startups are recognised by the DPIIT and over 540 have received exemption from angel tax so far.