Among the slew of relief measures announced on Friday by Finance Minister Nirmala Sitharaman, the decision to scrap the much-decried Angel Tax for start-ups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) has come as a huge relief for the start-up ecosystem.
“To mitigate genuine difficulties of start-ups and their investors, it has been decided that Section 56(2) (viib) of the IT Act shall not be applicable to a startup registered under DPIIT,” Finance Minister Nirmala Sitharaman said, adding that while the said section will continue to be part of the Income Tax Act, it will not be applicable to the startups registered with the DPIIT.
Multiple start-up founders have claimed that they have received notices under Section 56(2) (viib) of the Income Tax Act to pay taxes on angel funds raised by them. According to this provision, income tax is payable on capital raised by unlisted companies through the issue of shares if the share price is in excess of their ‘fair market value’.
The excess realisation is treated as income and taxed accordingly. The application of this taxon start-up companies had resulted in a huge outcry, and the government has been steadily easing the tax assessment process for those companies that have been served with notices in the past.
The finance minister’s decision to scrap the applicability of the provision for DPIIT recognised start-ups is seen providing huge relief to cash-strapped firms. “... these steps will empower the Indian start-up ecosystem by pruning the lingering problems with the angel tax,” Indian Angel Network Fund Founding Partner Padmaja Ruparel said.
SR Patnaik, Partner and Head (Taxation) at Cyril Amarchand Mangaldas agreed, adding that the move will “absolve” start-ups and keep them from being harassed by the tax authorities. “The FM has also assured the industry that tax authorities will not ‘overreach’. This is a very welcome statement and should provide a lot of comfort to the industry,” Patnaik noted.
Among other measures to aid start-ups, Sitharaman also said that a dedicated cell, headed by a member of the Central Board for Direct Taxes (CBDT), will be set up to address concerns faced by startups. “After this, if there is a difficulty, it has been decided to set up a dedicated cell under a member of the CBDT. Any start-up that has an issue can approach the cell for quick resolution of the problems,” she said.
Dedicated cell to solve start-up issues
Among other measures to aid start-ups, FM also said that a dedicated cell, headed by a member of the Central Board for Direct Taxes, will be set up to address concerns faced by startups. If they have any income tax related issue, they can approach the cell for a quick resolution of problems