The Department of Industrial Policy and Promotion (DIPP) will soon set up a committee of experts comprising members from IITs, IIMs to look into granting of tax exemptions to startups and related matters, as per the decision taken in a meeting held on Thursday by Revenue Secretary Ajay Bhushan Pandey with Central Board of Direct Taxes (CBDT) Chairman Sushil Chandra and DIPP Secretary Ramesh Abhishek.
Also, the CBDT has asked its field officials to meanwhile refrain from coercive action/measures to recover the demands of completed assessment under income tax from startups.
These decisions come a day after Commerce and Industry Minister Suresh Prabhu had tweeted that he had taken up the issue following concerns raised by investors about issuance of angel tax notices to startups.
“… it has been decided that the issue of recognition of these startups including that of premium, etc., will be decided on the basis of recommendations of a committee of eminent experts drawn from institutions like IIT, IIM, etc. which will soon be set up by the DIPP on the grant of tax exemptions and other connected matters,” a CBDT statement said. The panel will also give recommendations on individual cases of recognised startups to DIPP, it said.
Under the Section 56(2)(viib) of the Income-tax Act, companies with closely held shares, 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 is known as the angel tax.
The notices consider the value of funding received by startups, which is over and above the enterprise value, as ‘income from other sources’ and therefore, consider that as taxable.
In April, the government had tweaked the definition of startups to provide some relief wherein they were allowed to avail tax concession if total investment including funding from angel investors does not exceed Rs 10 crore. As per a notification by the commerce and industry ministry, an angel investor picking up stakes in a startup should have a minimum net worth of Rs 2 crore or should have an average returned income of over Rs 25 lakh in the preceding three financial years.
In February, the CBDT had directed income-tax commissioners not to take coercive measures against startups to recover the outstanding tax amount in case valuations have been modified or rejected by an assessing officer. Start-ups can avail income tax benefit for three out of seven consecutive assessment years, but they have to approach an eight-member inter-ministerial board of certification for getting such concession. A startup incorporated after April 1, 2016 but before April 1, 2021 is eligible for this tax incentive.
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