In a directive issued to its field officials, the Central Board of Direct Taxes (CBDT) has instructed them not to carry out scrutiny of startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) for angel tax provisions as amended in Budget 2023-24.
This clarification by the tax department comes after many startups had raised concerns about receiving scrutiny notices for angel tax. “Instances of cases of startups having been picked up for scrutiny under CASS (Computer-Assisted Scrutiny Selection) have been reported,” the CBDT circular said, adding that in this context, it is being clarified that procedure has been laid out for the assessment of such startup companies which have been recognized by the DPIIT.
“Where the case of such Startup Company is selected under scrutiny on the single issue of applicability of section 56 (2) (viib) of the Act, no verification on such issues shall be done by the Assessing Officers during the proceedings u/s 143 (2) or u/s 147/143(2) of the Act and contention of such recognized Startup Companies on the issue will be summarily accepted,” it said. A similar directive has been issued for scrutiny cases of startups involving multiple issues including section 56 (2) (viib) of the Income-tax Act.
Angel tax – which is income tax at the rate of 30.6 per cent – is levied when an unlisted company issues shares to an investor at a price higher than its fair market value. Earlier, it was imposed only on investments made by a resident investor. However the Finance Act 2023 proposed to extend angel tax even to non-resident investors from April 1, 2024.
Experts said the circular provides much needed clarity with respect to applicability of angel tax on registered start ups and is in the nature of administrative guidance to all field officers. Nangia & Co LLP Partner Amit Agarwal said, “The CBDT circular basically means that startups registered with DPIIT and whose case has been picked up for angel tax issues shall not be subject to any Assessment Proceedings, and AO shall be dutybound to give clean chit to such startups”.
The Finance Act, 2023, had amended Section 56(2)(viib) of the Income-tax Act. The provision, colloquially known as the ‘angel tax’ was first introduced in 2012 to deter the generation and use of unaccounted money through the subscription of shares of a closely held company at a value that is higher than the fair market value of the firm’s shares.
The provision had stated that when an unlisted company, such as a start-up, receives equity investment from a resident for issue of shares that exceeds the face value of such shares, it will be counted as income for the start-up and be subject to income tax under the head ‘Income from other Sources’ for the relevant financial year. With the latest amendment, the government had proposed to also include foreign investors in the ambit, meaning that when a start-up raises funding from a foreign investor, that too will now be counted as income and be taxable. The DPIIT-recognised startups were excluded from the angel tax levy.