Arecent series of so-called “angel tax” notices received by start-ups have caused consternation. Under Section 56 of the Income Tax Act, the tax department can investigate start-ups to see if they are conduits for tax evasion and money-laundering. However, the laws as they currently stand have a very negative impact on sentiment as they go against the spirit of the Start-up India initiative of the government. While the Central Board of Direct Taxes (CBDT) has agreed to refrain from coercive action against start-ups after a high-level intervention from the commerce ministry, the possibility of angel tax being levied remains since the law has not been amended. Moreover, start-ups that have already received notices will continue to face scrutiny and possible harassment. This problem has existed since 2017, when start-ups first raised concerns about the way this section could be interpreted. In effect, any investment in a start-up could be considered an attempt to launder profits. The crux of the issue is that the interpretation depends on the discretion of IT officials. In other words, if an officer decides that equity investments have been made at above “fair-value”, they may raise a demand to tax excess valuation as profits.
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First Published: Tue, December 25 2018. 00:41 IST