Start-ups welcome end of 'angel tax', hope relief for already served notice

Sitharaman also said a dedicated cell will be set up under a member of the Central Board of Direct Taxes for addressing issues faced by start-ups

Finance Minister Nirmala Sitharaman on Friday said registered start-ups would be removed from the purview of the “angel tax”. The sector welcomed the move, which has been a long-standing demand, and hoped there would be relief for those start-ups that had already received notices under the provisions of the law. 

According to the Section 56(2)(viib) of the Income-Tax (I-T) Act, the amount raised by a start-up during a funding round which is more than its fair market value would be deemed an income from other sources and taxed at 30 per cent.

Sitharaman said, “To mitigate genuine difficulties of start-ups and their investors, it has been decided that Section 56(2)(viib) of the Income-Tax Act shall not be applicable to a start-up registered with the DPIIT (Department for Promotion of Industry and Internal Trade).” 

The sector welcomed the announcement.

Software product industry think tank iSpirt hailed the move. “This is a very good step. But we hope that it is applicable to start-ups who have already got notices,” said Nakul Saxena, director, public policy at iSpirt.

Sitharaman also said a dedicated cell will be set up under a member of the Central Board of Direct Taxes (CBDT) for addressing issues faced by start-ups. “Any income tax-related issue faced by any start-up would be resolved quickly by this cell,” she said.

Ashish Aggarwal, senior director and head, public policy, Nasscom, said, “The proposed cell should look into concerns of all start-ups, including those who are already under notice.”

S R Patnaik, partner and head, taxation, Cyril Amarchand Mangaldas, said, “Acknowledging the widespread criticism faced by tax authorities for their enthusiasm to tax start-ups, the government has finally decided to put a full stop to it. It is a widely expected move.”

He said the industry was facing an impending slowdown. “This decision means if you are registered, you will not be bothered by the tax authorities,” Patnaik added. 

The “angel tax” was introduced as an anti-abuse measure for tax evaders in 2012. The DPIIT specified in February that start-ups would have to attest that they have not invested in any unused land, any vehicle priced over Rs 10 lakh and in jewellery, among other things. Start-ups are also not allowed to extend loans and advances.

Declarations made by start-ups to the DPIIT are sent to the CBDT, which issues an exemption certificate after scrutiny. Start-ups have been served notices by the CBDT questioning their source of funding or valuations. for addressing issues faced by start-ups.