New angel tax regime: No scrutiny of recognised startups, says CBDT

The Central Board of Direct Taxes (CBDT) has issued directives to tax officials that may prevent them from scrutinising funds raised by recognised start-ups under the new angel tax regime.

In a recent communiqué to senior officials, the direct tax administration said that no verification would be done by any assessing officer if a start-up has been recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) and the case is selected under scrutiny for pending angel tax assessment.

It said the applicability of angel tax would not be pursued during the assessment proceedings of such recognised start-ups and the assessing officer shall be duty-bound to accept the argument of such a firm and drop the proceedings.

The angel tax is on the amount received by a company above the fair market value as income. The clarification concerns pursuing applicability of angel tax on registered startups in view of the new norms.

The Union Budget 2023 proposed extending the angel tax provisions to transactions involving foreign investors. Till now, these provisions were applicable only to local resident investors, but the ambit has been expanded as part of the government’s anti-tax avoidance move. An initial estimation suggests that over 80,000 DPIIT-registered startups will not come within the tax purview.

CBDT, however, underlined that if a recognised startup is selected under scrutiny with multiple issues including the angel tax, the proceedings will be dropped with respect to angel tax. It asked that “due procedure be followed” about other issues for which the case has been selected.

“This provides much needed clarity with respect to applicability of angel Tax on registered startups and assists in providing a litigation-free framework. The clarification is in the nature of administrative guidance to all field officers, who have in the past tinkered with angel tax valuations of startups and accordingly attributing tax costs,” said Amit Agarwal, partner, Nangia & Co LLP.

“This is pursuant to the Finance Act, 2023, amendment in Section 56(2) (VIIB) whereby the words ‘being a resident’ have been omitted — effective from April 1, 2024,” the communiqué noted.