Now Tax man need approval from CBDT to probe Startups on Angel tax

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Posted On : 08th, August 2019


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Startup community

Now Tax man need approval from CBDT to probe Startups on Angel tax

08th, August 2019    -    Startup community

The Central Board of Direct Taxes (CBDT) has explained that IT representatives will need the permission of their superior to scrutinize start-ups pursuant to Section 56(2)(viib) of the Income Tax Act, now known as angel tax, and for "other problems." The move is in line with last month's budget announcement from finance minister Nirmala Sitharaman.


In a notification dated August 7, the CBDT said the law would apply even when evaluating startups that have not acquired the Department of Industry Promotion and Internal Trade's (DPIIT) exemption certificate for' angel tax.' For startups with the certificate, no verification will be performed on the basis of Section 56 by evaluating officers (AOs).


Nakul Saxena, Ispirt's director of public policy, a think-tank, said, "It's a welcome move from the CBDT that will assist alleviate the issues startups face. However, this provision should be temporary for startups that have not obtained the exemption from the DPIIT, as it could lead to misuse by poor performers.


The DPIIT introduced a mechanism previously this year whereby start-ups incorporated less than 10 years ago with such a share premium not exceeding Rs 25 crore as well as a turnover of less than Rs 50 crore would meet the criteria for an automatic exemption from section 56(2)(viib) of the I-T Act. Hundreds of startups had opted for the exemption within a few months of moving.


Even after the mechanism was placed in place, however, a few startups had complained about getting notices from tax officials about assets they had raised above the fair market value at valuations. Industry, startups, and investors had encouraged the government to discover a permanent solution to the problem.


Section 56(2)(viib), implemented in 2012, deals with the problem of a start-up taking into account the problem of stocks exceeding the fair market value of such stocks. For a long time, tax authorities have maintained that excess consideration is income for startups and that they ought to pay tax on it.


The CBDT's recent circular mentions that AOs will need to seek previous authorization from their superiors even to conduct "other issue" inquiries, but does not explain what "other problem" implies. In addition to Section 56, startups also claim that they are concerned about the identity of their shareholders under Section 68 of the I-T Act.


Sitharaman had said in her budget speech that the govt is working on a system for e-verifying investors, which was understood to be a valid fix for Section 68 of the I-T Act dealing with unexplained money credits. However, the govt has so far made no such notification public.


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