Angel Tax: CBDT exempts startups with assessment orders prior to Feb 19 notification

After facing resistance and criticism from startups on a half-hearted measure to resolve Angel Tax problems, the Indian Government has issued a new notification overruling the  February notification released by the Department for Promotion of Industry and Internal Trade (DPIIT).

The earlier notification had barred startups, who got assessment orders before  Feb 19 from availing Angel Tax exemption.

As per CBDT new notification, the eligible startups will get an exemption from the Angel tax levy even if their assessment orders were passed before February 19. 

The notification also mentioned that the earlier notice afflicted unnecessary trouble on the startups and caused hardships to entrepreneurs.

The startup community has welcomed this step as this will ease their capital raising woes and help them get tax benefits after going through a scrutiny process, which as per startups is an exhausting process. 

The taxation was levied on capital receipts of unlisted companies, who issued shares through private placements and off-market transactions. It was introduced as an anti-evasion measure for corporates, who issued shares for much more than their fair value.

The premium was chargeable under section 56(2)(viib) of the Income Tax Act, 1961 as ‘Income from Other Sources’.

Introduced as a measure to curb tax evasion, the new levy ended up hurting the startups, who were raising money from angel investors and venture funds through private placement. The move faced protests from both investors and startups alike, accusing the government of unfair treatment.

Talking about the recent development, Sreejith Moolyali, founder of food True Elements said that this is a step in the right direction, though there are still archaic clauses that affect the startups.

 “I don't think it's still solved,  according to the present rules any money raised by us cannot be parked in Fixed Deposits or liquid funds. The government expects us to deposit the investment proceeds in current accounts or the exemption we have received could still get canceled, which is not viable for startup entities”, he added.

Serial entrepreneur and Partner of GrowthStory, K Ganesh, hailing the govt's move said that this will lighten the burden of startup entrepreneurs, who in their everyday operations face the burden of legal fees, mental pressure of income tax notices and scrutiny processes add to the problems.

However, many startups are still seeking more clarification on the notification, as the actual threshold limit for turnover imposed by the Income Tax department stays at Rs 25 crore even after the notification

"It does not provide any clarity on those startups who fall under the category 1 (DIPP registered and angel tax exempted with limited scrutiny) and their appeal has been rejected by CIT or also the one where the appeal has now been made at ITAT, which takes two years time for even first hearing. Startups facing these issues have their tax refund amount blocked and accumulated losses not being adjusted will affect the tax calculation for these 2-3 years," said Ayush Bansal, Founder, and CEO of iDreamcareer.

In the past couple of months, the govt has shown intent to resolve issues related to startups. But somehow the changes have not been translated on the ground.

Apart from defining startups, it increased the overall consideration limit for shares issued by startups for the exemption to Rs 25 crore from the earlier limit of Rs 10 crore.

Last week, CBDT had released a circular citing that assessing officers would require prior approval from their supervisory officers before starting any scrutiny process on startups over angel tax. It also mentioned that there would be no verification required if a startup has been recognized by the DPIIT.