The income tax department issued a clarification to its field formations to spare startups registered with the Department of Promotion for Industry and Internal Trade from scrutiny on angel tax. This comes at a time when startups that have non-resident investors have received notices on the valuation of investments made by non-residents.
However, the directive also mentioned that an inquiry or verification of other issues mentioned in the notice can be carried out by the tax department officers. It was also clarified that any contention by these startups on the issue would be summarily accepted. According to government data, there are over 99,000 DPIIT-recognised startups across 670 districts of the country as of May 31 this year.
The clarification provides much-needed relief to the startups, which already have to endure a funding winter, according to Divakar Vijayasarthy, founder and chief executive officer of DVS Advisors LLP.
Why Was This Clarification Needed?
Section 56(2)(viib) of the Income Tax Act, 1961, which is better known as the Angel Tax provision, taxes the excess consideration received by unlisted companies with respect to shares issued by them over and above the fair market value.
In the Union budget 2023, the scope of the angel tax provision, which previously only included local investors, was expanded to include non-residents. This meant that starting April 1, 2024, a non-resident investor would also face a tax liability at a rate over 30% when shares are issued at a price over the fair market value.
After amendment of the section, as part of the Computer-Assisted Scrutiny Selection process, notices under Section 143(2)/147—where the Assessing Officer would require more details—were automatically issued to startups with respect to the applicability of angel tax.
What Does This Mean Now?
The move would offer relief to DPIIT-recognised startups, as the tax department is expected to accept the taxpayer contention (in the case of DPIIT-recognised startups that received notices) and no longer follow up on this issue.
This is a "welcome step" that addresses some of the vexing problems that startups registered with DPIIT face on the subject of angel tax, said Rony Antony, partner for corporate tax at BDO India LLP.
"The tax department would also be able to focus on core issues, and this step would allow startups that are registered with DPIIT to not be subject to needless challenges for tax authorities," he said.
Source: Bloomberg