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Angel Tax

How new DPIIT notification has shortchanged TAX harassed startups?

Angel Tax

There has been a talk of a new DPIIT directive for a while. There was a startup group representing their case with DPIIT. Much was expected. A new notification has come and the government is claiming that it has served the cause of the startups. The media is applauding. The interlocutors are celebrating. It is VICTORY we are being told.

So what was achieved?

  1. The definition of startups has been widened. Companies with up to 10 year life after incorporation or turnover up to Rs 100 Cr as money can now apply as startups with DPIIT.
  2. The startups — if having DPIIT certification and receiving investments received for share capital up to Rs 25 Cr will now have a blanket cover from clause (viib) of sub-section (2) of section 56.
  3. DPIIT/CBDT can now claim that they are the champions of the startup community and are getting much needed media attention. The media outrage is being put to rest. The startup community is divided in the middle.

Why has this notification shortchanged the startup community?

  1. The notification applies from the date of issue of notice. The troubles are far from over of any startup already having received the notices or Assessment Orders — as the Clause 6 explicitly states that this does not apply to startups already having received the Assessment Orders.
  2. The issue of startups having received notices and assessment orders under section 68 of the IT act have not gotten any relief. The fact of the matter is that in case of our company the Assessment order under which pretext the daylight robbery was committed by the AO is under section 68 of the IT act.
  3. There have been oral assurances by the people who represented the startup that these will be taken up by the CBDT. However we do not expect anything more here than the appeals process being expedited which means it will come down to many months as against many years. The details (ITRs, PAN, Bank statements, Computation of income which is hard to obtain by the startups from Angels will still be needed).

What is broken here?

  1. There was a recent news report that more than 75% of the startups are undergoing IT scrutiny process. 140 of these whose names were submitted to CBDT by TiE had received assessment orders. The very reason this notification was brought out has not been addressed in the first place.
  2. Section 68 of the IT act states that — “68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory”. The catch here is that it is to the “satisfaction” of the Assessing Officer. We can make the guess what it could mean in Indian scenario? By law the AO can ask a startup to provide the money trail to as many levels till he is satisfied. So in effect the startup is supposed to do the job of another department under the Ministry of Finance — namely — “The Enforcement Directorate”. Simply providing PAN card and KYC details will not suffice for an AO. The appeals process is even more stricter.
  3. In a country where we have big corporate houses being responsible for the majority of more than Rs 10 Lakh Crore NPAs, the startups will continue to struggle for raising investment money. Banks will not lend as most startups will not qualify because of the rules applied to lending are equally broken.
  4. Angels who are already scared will continue to be scared.
  5. The bureaucratic processes are being increased so now in addition to PAN/TAN/GST/PF/ESI/Shops & Establishment certificates, the starups will need DPIIT certificates.

We expected much more and we are disappointed to having been backstabbed.

Disclaimer: The story first appeared on Medium is published with permission from the author.

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