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All DPIIT-registered startups to be exempt from angel tax: FM

Announcing measures to achieve high economic growth on Friday, Minister of Finance Nirmala Sitharaman said that a dedicated cell will be set up under a Member of Central Board of Direct Taxes (CBDT) for addressing any tax-related problems being faced by startups.

By: ENS Economic Bureau | New Delhi |
August 24, 2019 1:31:40 am
New Delhi: Finance Minister Nirmala Sitharaman and and MoS for Finance Anurag Thakur during a press conference in New Delhi, Friday, Aug 23, 2019. (PTI Photo/Atul Yadav)(PTI8_23_2019_000168B)

In what is expected to bring huge respite to the startup community, the government on Friday announced that it would extend the breaks given under the ‘angel tax’ provisions to all startups registered with the industry department. Prior to this, angel tax exemption was given to only those startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) that sought such breaks and met certain criteria.

However, the section 56 (2) (viib) of the Income Tax Act will continue to remain applicable for all other entities.

Announcing measures to achieve high economic growth on Friday, Minister of Finance Nirmala Sitharaman said that a dedicated cell will be set up under a Member of Central Board of Direct Taxes (CBDT) for addressing any tax-related problems being faced by startups.

The angel tax issue has been a bone of contention between startups and the tax department. Startups and their angel investors are allowed exemption under Section 56 (2)(viib) of the Income Tax Act as per which closely-held companies, when issuing shares, are charged 30 per cent tax on the difference between funds raised as per the actual valuation and the fair-market value of the company. This, within the start-up community, is known as the angel tax.

Earlier, the government had issued a number measures to relax the norms for startups seeking exemption under the aforementioned provision. In her maiden Union Budget Speech, Sitharaman had acknowledged the concerns faced by startups on account of angel tax provisions. “Start-ups in India are taking firm roots and their continued growth needs to be encouraged. To resolve the so-called ‘angel tax’ issue, the start-ups and their investors who 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. The issue of establishing identity of the investor and source of his funds will be resolved by putting in place a mechanism of e-verification. With this, funds raised by start-ups will not require any kind of scrutiny from the Income Tax Department,” she had said.

Welcoming the move, SR Patnaik, partner & head – taxation, Cyril Amarchand Mangaldas said: “Acknowledging to the widespread criticism faced by the tax authorities for their enthusiasm to tax start-ups, the government has finally decided to put a full stop to it. It is a widely expected move and with an impending slowdown looming over the industry, the Government has decided to absolve start-ups from being harassed by the tax authorities. Today’s decision means that once you are registered as a start-up with the DPIIT, you will not be bothered by the tax authorities”.

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