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CBDT breather soon on past angel tax demands
January, 21st 2019

In what will come as a relief for startups that have already been sent assessment orders and firm tax demands under the so-called 'angel tax,' the Central Board of Direct Taxes (CBDT) will soon issue a circular directing field officials not to press for payment until the case has been decided at the first stage of appeal.

In cases where notices have been issued, no action will be taken, allowing investors to approach CBDT and get relief under the new, simplified scheme announced on Wednesday.

"The board will soon issue a circular in line with the new scheme notified by the Department of Industrial Policy and Promotion (DIPP)," a top CBDT official told ET. Tax officers will be directed to give relief to startups and angel investors in line with the new scheme for all past cases where notices have been issued, the official said.

Additionally, all the cases will be decided on a fast-track basis.

Assessment was carried out in the case of 117 startups for assessment year 2016-17 and tax demands were raised only for 19 of them. These cases will benefit from the decision.

DIPP notified a new scheme on Wednesday for startups and their investors to shield them from the angel tax. This doesn't provide relief in cases where assessment orders have been issued. The CBDT circular will provide relief in these cases by not pressing for payment of tax until appeals are decided.

A simpler mechanism

The scheme provides a simpler mechanism for startups to claim exemption even for past investments, including those incorporated before April 2016, the cutoff date for incentives under the startup policy announced by the government.

CBDT had asked tax officials in 2017 and 2018 not to push for payment or use strong measures to recover angel tax from startups. However, this had little impact, according to experts.

The upcoming CBDT clarification will address concerns regarding past investments where angel tax assessments are already underway. Startups and investors need to make an application via DIPP along with documents. CBDT will then issue a certificate of exemption within 45 days of the application. The application will no longer be required to be cleared by the inter-ministerial committee.

Also, a fair market valuation certificate from a merchant banker is not needed any more. The application only seeks a justification for the valuation of shares along with supporting documents if any.

Startups in which the aggregate amount of paidup share capital and share premium does not exceed Rs 10 crore will be eligible for angel tax exemption. Angel investors with a declared income of Rs 50 lakh or more in their returns for the preceding year will be eligible.

Additionally, the investor's net worth should exceed Rs 2 crore or the amount of investment proposed in the startup, whichever is higher, as on the last date of the financial year preceding the investment year.

Under Section 56 (2) of the Income Tax Act, when a closely held company issues shares at a price that exceeds fair market value, the difference will be taxed as income from other sources.

Meant as an anti-abuse measure, it was introduced by former finance minister Pranab Mukherjee in 2012. It came to be called the angel tax as it impacted angel investments in startups. The levy of this tax on a number of startups had rattled the sector, creating pressure on the government to announce relief.

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