Finance ministry clarification helps startups breathe easy on angel tax

Finance ministry clarification helps startups breathe easy on angel tax
Nirmala Sitharaman  |  Photo Credit: Photo Credit: Reuters
8 Aug, 2019

A clarification issued by the finance ministry on Wednesday has provided some relief to startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) facing angel tax assessment.

Angel tax refers to section 56 (2) (viib) of Income Tax Act which treats angel funding received by a startup at a premium valuation as income from other sources and taxing it at 30% on par with corporate tax. 

The clarification lays down the procedure to be followed by Assessment Officers (AOs). In case of DPIIT recognised startups which have been selected for limited scrutiny under multiple issues or complete scrutiny, the AO will be required to seek approval from a supervisory officer to proceed with inquiry of verification. 

“The clarification will definitely be a relief for DPIIT recognised startups which are at an assessment or reassessment stage,” said Lokesh Shah, partner at law firm L&LPartners. He also added that there is no relief for startups which are currently in the appeals stage.

Despite the February notification by DPIIT hearing of appeals were held up for multiple startups due to lack of clear directive from the Central Board of Direct Taxation

“The language doesn’t clearly say that startups with demand orders should be let go. But it does make the case to remind the AO that the government is serious on what needs to be done,” said Ashish Chaturvedi, founder of Schooldiary, who was awaiting the hearing of his appeal.

Atul Pandey, partner at Khaitan & Co, said: “We expect that the clarification should also apply retrospectively in favour of startups whose appeals are under consideration.”

The measure follows the announcement made by finance minister Nirmala Sitharaman during the budget speech, saying that startups and investors filing requisite returns will not be subject to scrutiny on valuations or share premium.