Angel Tax: Govt introduces 200% penalty for startups not complying with norms

Even while the Angel Tax continues to still keep over hundreds of startups on tenterhooks, the government has introduced a penalty clause for startups, not complying with listed conditions, in an amendment to the Finance Bill, which has been passed by the Lok Sabha on Thursday.

As per the clause, startups who seek exemption under Section 56(2)(viib) of the Income Tax Act need to comply with govt's condition or face 200% as a penalty for misreporting.

It further says that startups claiming exemptions from Angel Tax cannot buy a motor vehicle. If a startup is found in contravention to the condition of notification by the DPIIT, it will be liable to pay Angel Tax and 200% penalty, said a Business Standard report.

The above-mentioned clause is introduced to promote genuine startups and curb the misuse of Angel Tax exemption.

Now, the bill will be tabled in the Rajya Sabha.

As DPIIT notifications, startups need to attest that they have not invested in any unused land, any vehicle over Rs 10 lakh in value, and in jewellery, among others.

In addition, startups are also not permitted to give loans and advances.  Several startups and Industry observers hail the move by the government

"I think this is fair, this is to make sure companies don't get into these practices," said Sreejith Moolayil, Founder of True Elements.

Meanwhile, many startups still think that government has not done what it promised before the poll on the issue of Angel Tax.

"The penalty is fair but can we first solve the issue as hardly very few startups have got the Angel Tax exemption till date.  The Govt seems to be choking the miscreants rather than protecting the innocents, said Ayush Bansal, Founder, and CEO of iDreamcareer.

Earlier on July 5, while presenting her maiden budget, FM Nirmala Sitharaman had proposed that startups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums.

The Special Administrative arrangements shall be made by Central Board of Direct Taxes (CBDT) for pending assessments of startups and redressal of their grievances, she added. The FM also proposed startups to go to a senior officer for Angel Tax exemption approval and then to a committee, which will judge whether the startup is applicable or not.

The clause added more work for startups seeking Angel Tax exemption. About 200 startups, who have demand orders before the issue of Feb 19 DPIIT notifications, can't apply for exemption as per govt notification.

Currently, the Angel Tax exemption is only for startups, who have demand order after the Feb notification.