The Central Board of Direct Taxes has come out with a detailed procedure for assessment of start-ups having angel tax exemption.
This procedure is a logical move to the notification issued by the tax body in March, which reiterated that the ‘provisions of Clause (viiB) of Sub Section (2) of section 56 of the Income Tax Act shall not apply to consideration received by a start-up company provided it is recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) and aggregate amount of paid up share capital and share premium of the startup after issue or proposed issue of share, if any, does not exceed, ₹25 crore.” This was preceded by a notification by the DPIIT in February.
There have been instances that notices issued before the notification gazetted or even after that are yet to be disposed of. Keeping that in mind, the tax body has now categorised start-ups into three categories for assessment purposes.
Three categories
The first category comprises start-ups recognised by the DPIIT. These will be limited scrutiny’ cases with single application of Section 56(2)(viib). No verification on such issues will be done by the tax officer and the contention of such recognised start-up companies will be summarily accepted.
The second category covers recognised start-up cases selected under limited scrutiny with multiple issues or under complete scrutiny including the issue under Section 56(2)(viib). Here the issue of applicability of this section will not be pursued during the assessment proceedings and inquiry or verification with regard to other issues in such cases will be carried out by a tax official, only after obtaining approval of the supervisory officer.
The third category is of start-ups which have not got DPIIT approval and the case is selected for scrutiny on the grounds of applicability of Section 56(2)(viib) or any other issue. Here, inquiry or verification will be carried out by a tax official, as per due procedure only after obtaining approval of its supervisory officer.
Angel tax is levied on the capital raised via the issue of shares by unlisted companies from an Indian investor if the share price of issued shares is seen in excess of the fair market value of the company. The excess realisation is considered as income and, therefore, taxed accordingly under Section 56(2)(viib).
According to Rakesh Nangia, Managing Partner, Nangia Advisors (Andersen Global), allaying the concerns of the start-up community, the government had exempted investments made by domestic investors in the companies approved by the DPIIT from angel tax.
However, start-ups had concerns over the assessment proceeding already underway. To ease things for start-up companies, the CBDT has further clarified the procedure to be followed by tax officers while handling the assessment proceeding of such start-ups.
Directions of the CBDT that the tax officer will have to summarily accept the contentions of the start-up on valuation of its shares shall provide the relief intended to be provided to the start-ups.
“While the recognised start-ups stand relieved, the ones that are yet to receive a nod from the DPIIT may still have to face inquiry from tax officers and the procedure to be followed by the tax officers in such cases would be crucial to note,” he said.