The Central Board of Direct Taxes (CBDT) is examining the angel tax issue and could issue a clarification that lifts the threat of this levy and associated penalties hanging over startups. The Department of Industrial Policy and Promotion (DIPP) said the government will ensure there is no harassment of angel investors and startups.

“Details have been sought from the field,” said a senior government official with knowledge of the matter. “A clarification can be issued (by CBDT) if need so arises.”

The so-called angel tax is in focus after some startups in Bengaluru and Mumbai got notices from the taxmen. That prompted commerce and industry minister Suresh Prabhu to tweet that his ministry, which administers the Startup India programme, had taken up the issue with finance ministry.

The scare stems from income tax officials zealously following the law, raising the concern that this could squeeze the country’s startup culture, which the government is keen to encourage as a source of growth and employment generation.

The official said no action has been taken against startups recognised by the DIPP under the Startup India policy that was launched in January 2016 to build a strong ecosystem for nurturing innovation and entrepreneurship in the country. Some startups not registered by the DIPP may have been caught up in the Computer Aided Scrutiny Selection, leading to the issuance of notices, the official said.

Only two applications have been received since the Startup India norms were revised in April, DIPP secretary Ramesh Abhishek told ET. He urged companies to come forward and apply for such approval. The DIPP said on Wednesday that it had taken note of the matter. It had in April put in place a mechanism to grant exemption from provisions of Section 56(2) (vii b) of the Income Tax Act to genuine investors in recognised startups.

Will Protect Genuine Investments: DIPP
“DIPP has again taken up this matter of issue of IT notices with the DoR (department of revenue) so that there is no harassment of angel investors or startups,” DIPP said in a release. “Government is committed to protecting bona fide investments into startups.”

GENESIS OF THE ISSUE
The taxation provision had been introduced by former minister Pranab Mukherjee in the 2012 budget to arrest the laundering of funds. This followed instances of individuals using unlisted, lesser known companies to convert black money into white.

The angel tax is applicable on capital raised by unlisted companies from any individual against an issue of shares in excess of the fair market value. The law reasons that this excess amount is akin to “income from other sources” and should be taxed under Section 56 (II) of the Income Tax Act.

HELPING HAND
The CBDT had issued a directive asking field officials to refrain from coercive action in February.

“It has been decided that in case of startup companies that fall within the definition of the DIPP notification... if additions have been made by AOs (assessment officers) ... no coercive measure to recover the outstanding demand would be taken,” it told commissioners, asking them to dispose of cases by March 31.

In April, the government allowed startups to avail of tax concessions if total investments including funding from angel investors didn’t exceed Rs 10 crore.