After the Union finance ministry came out with detailed guidelines to allay fears of start-ups over angel tax last Friday, the industry ministry will now look at the remaining niggling related to a circular it issued in February, which may deny some start-ups from gaining exemption from the tax.
Officials said they were aware of issues that start-up entrepreneurs have been raising and would be looking at them including the possibility of denial of tax relief in case a start-up gives loans, invests in equity or other securities, or invests capital in other firms.
“These provisions were made as it was felt that if a firm was able to do all this, they were financially sound enough,” said an official from the department for promotion of industry and internal trade.
“However, we understand that these are normal business practices all over the world that even as one is raising capital for a start-up, the start-up may also be investing somewhere else and also giving loans or advances for raw material or services which they would procure,” he said.
On Friday, the Central Board of Direct Taxes (CBDT) issued comprehensive guidelines for start-ups on angel tax levied under Section 56 (2) (vii b) of the Income Tax Act. The main objective of the guidelines was to ensure start-ups recognised by the DPIIT would not face any coercive action from tax authorities on angel investments. The fear on part of the tax authorities was that the premium payment was a way of gaining a tax shelter by the investor.
The CBDT was earlier issuing tax notices in all cases of angel investments where start-ups had been equity funded at premium over the book value of their shares. The current guidelines aim to ensure that the start-ups that are recognised by DPIIT will not face any action. Also, tax claims will not be pursued even if the assessment has been done.
The CBDT has also established a five-member special cell to address the grievances of start-ups related to angel tax or other tax issues. “It has been reiterated time and again by CBDT that an outstanding income tax demand relating to additions made under Section 56 (2)(vii b) would not be pursued and no communication in respect of the outstanding demand would be made with the start-up entity. Other income tax demands would not be pursued unless the demand was confirmed by ITAT,” CBDT said in its guidelines.