Angel Tax on Start-ups: Modi government has further simplified the rules for the assessment of start-ups. Under the new rules, the relaxation given by the government will be extended to those start-ups that have received demand notices for receiving investment from angel investors or venture capital funds. Income Tax department will summarily accept the contention of those start-ups who have been facing limited scrutiny for a single issue under the section 56 (2) (viiib) of the Income Tax Act, said the ministry of finance. In other cases, assessing officer will not be able to proceed with the inquiry against the DPIIT recognised start-ups without obtaining the approval of his supervising officer.
A large number of start-ups had received notices from income tax department for diluting their shares to non-resident Indians and venture capital funds at a premium to raise money.
However, after hectic lobbying, the Modi government had relaxed the criteria to save them from the harassment at the hands of income tax officials. The Department of Promotion for Industry and Internal Trade (DPIIT) had issued a circular in February this year to relax the norms.
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The notification dated February 19, 2019 extended the relief in prospective cases of inquiry by the Income Tax department. The DPIIT notification did not cover the earlier cases of FY2016-17 and later, where a tax demand was already pending before tax authorities or the appellate tribunal.
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A large number of start-ups complained to finance minister Nirmala Sitharaman about the issue. These representations eventually led the government to amend the DPIIT notification dated 19 February to extend the relief to earlier cases as well.
In addition to this, the CBDIT also decided to go easy on the cases related to the start-ups as per the Modi government’s flagship policies of Start-up India and Stand-up India.
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In cases where scrutiny assessments of Startup entities are pending, the CBDT has decided that: “In case of Startup Companies recognized by DPIIT which have filed Form No. 2 and whose cases are under limited scrutiny on the single issue of applicability of section 56(2)(viib), the contention of the assesses will be summarily accepted,” said the CBDT in a statement.
The second category will involve those cases, where a start-up has been probed by multiple issues relating to applicability of 56(2)(viib), In such cases further probe will not be carried out by the assessing officer without taking the approval of his senior officer if the start-up has been recognised by the DPIIT and if it has also filed Form No 2.
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Third category will be of those start-ups where the firm has been recognised by the DPIIT but it has not filed Form No. 2. In a big relief to start-ups, even in these cases, income tax officials will not initiate inquiry without prior approval of their supervisors.
