In a move expected to ease scrutiny of startups over the capital they have received from angel investors, the Central Board of Direct Taxes (CBDT) has issued directions to income tax assessing officers (AOs) on how to approach pending angel tax assessments.
This includes mandating these officials to proceed with any scrutiny only after seeking approval from their supervisory officers. In a clarification issued Wednesday, CBDT has laid out procedures that prevent assessing officers from scrutinising angel capital raised by startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT). In case the startup has not received DPIIT approval, officers are only allowed to carry out any inquiry or verification “only after obtaining approval of his/her supervisory officer.” Nearly 20,900 startups have been recognised by DPIIT so far, and over 540 startups have received exemptions from angel tax.
In the event that a startup is recognised by DPIIT, but the assessing officers are scrutinising it for multiple issues, the officials cannot pursue scrutiny under an anti-evasion provision of the Income Tax Act, 1961, in its assessment proceedings. This provision, Section 56(2)(vii)(b), deals with taxation of share premiums received in excess of the fair market value and has been used in the past to serve demand notices to startups over the angel capital they have raised.
The circular added that “inquiry or verification with regard to other issues in such cases shall be carried out by the assessing officer, only after obtaining approval of his/her supervisory officer. Due procedure as per I-T Act shall be followed with regard to other issues for which the case has been selected.”
The latest clarification follows an announcement by Finance Minister Nirmala Sitharaman during the presentation of the Union Budget on July 5. Sitharaman had stated that the continued growth of startups in the country needs to be encouraged.
“To resolve the so-called ‘angel tax’ issue, the startups 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,” she stated, adding that the issue of establishing identity of the investor and source of startup funds will be resolved by putting in place an e-verification mechanism, which will exempt startups from “any kind of scrutiny” by the Income Tax Department.
“In addition, special administrative arrangements shall be made by Central Board of Direct Taxes (CBDT) for pending assessments of startups and redressal of their grievances. It will be ensured that no inquiry or verification in such cases can be carried out by the Assessing Officer without obtaining approval of his supervisory officer,” Sitharaman stated.
Income tax scrutiny over angel investment has long proved to be a pain point for India’s startup industry, which has alleged such “harassment” was discouraging investment.
According to community social media platform LocalCircles, 73 per cent of over 2,800 startups that raised capital said they received one or more angel tax notices. Over 200 of these startups have received demand orders, according to LocalCircles founder Sachin Taparia.
“The notification from CBDT … will be of help to all startups who have received a limited scrutiny notice for FY16-17 in September 2018,” he told The Indian Express. “The startups can now take their exemption certificate and this notification to the AO and seek relief from the scrutiny,” he added. Around 500 startups raise angel capital in India each year, he said.
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