IT officials will require approval to scrutinise startups for Angel Tax

In what could be a mild relief to startups facing angel tax issue, the Indian government has laid down the process to resolve already pending tax assessments issue.

As per new CBDT circular, income tax officer would require supervisory officer approval to scrutinise startups over angel tax.

There would be no verification required by an assessing officer if a startup has been recognized by the Department for Promotion of Industry and Internal Trade (DPIIT).

It also added that the applicability of angel tax would not be pursued during the assessment period.

The development follows after FM Nirmala Sitharaman budget presentation in Feb. 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.

“It will be ensured that no inquiry or verification in such cases can be carried out by the Assessing Officer without obtaining approval of his supervisory officer,” she added.

Soon after the FM proposal, though, startups complained of no exemption from angel tax retrospectively. If an assessment order of a startup has been done before DPIIT notification, then it won’t be exempted.

Meanwhile, one of the IT sections under which startups are issued notices is — 56(2)(viib), which deals with valuations (classification of funding as income or investment).

Over the years, several startups raised a concern about the section, which says if a closely held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be charged as income from other sources.

Startups are levied around 30% Angel Tax on investments made by external investors.

In February, the DPIIT had issued a notification stating that registered startups would be exempt from the angel tax if they met certain conditions. The department was to send the names of such start-ups to the CBDT.

There has been back-and-forth shift of blame between the CBDT and the DPIIT over finding a solution to the Angel Tax issue. Many startups still complain of being harassed by IT officials.

The govt claims to have provided over 540 startups exemption from angel tax so far.