In what comes as a relief to start-ups, the Central Board of Direct Taxes (CBDT) has circulated a new set of guidelines for the assessment and tax scrutiny of fledgling businesses. The circular issued by the CBDT earlier this week is in line with Finance Minister Nirmala Sitharaman’s promises in the Union Budget to resolve taxation issues plaguing start-ups.
The circular is part of the CBDT’s efforts to deal with pending angel tax cases and the tax body has now classified start-ups into three categories for assessment purposes. Angel tax is levied on capital raised by unlisted companies (as most start-ups are) through the issue of shares from an Indian investor if the price of the issued shares is considered to be more than the fair market value of the company.
This excess realisation is considered as income and is subject to tax under Section 56(2) (vii.B) of the Income Tax Act. After an outcry from affected start-ups, the CBDT issued a notification in February which said that this section “shall not apply to consideration received by a start-up firm provided it is recognised by the DPIIT and aggregate amount of paid up share capital and share premium of the start-up after issue or proposed issue of share, if any, does not exceed, Rs 25 crore”.
Now, the department has classified start-ups into three categories in order to assess them. The first is comprised of start-ups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT). These firms will be subject to limited scrutiny and no verification on such issues will be done by the tax officer, with the department stating that the contention of such recognised start-up firms will be summarily accepted.
The next category comprises recognised start-up cases selected under limited scrutiny or complete scrutiny with multiple issues including Angel tax. The new guidelines say that the applicability of the Angel tax section will not be “pursued during the assessment proceedings and inquiry or verification with regard to other issues in such cases will be carried out by tax officials only after obtaining approval of the supervisory officer”.
Prior approval must
In all three cases, tax officials may begin inquiry or verification against start-ups only after obtaining approval of its supervisory officer.