Freedom from tax burden for angel funds
Exemption from angel tax even if assessment order was passed before February 19.
The Central Board of Direct Taxes has exempted even those startups where additions were made to incomes and assessment orders were passed before that date.
The Department for Promotion of Industry and Internal Trade (DPIIT) had issued a notification on February 19 that barred startups from availing of the tax exemption if they had a prior assessment order.
“This has caused hardship to such companies,” the CBDT said in a notification.
With this clarification, the government has provided comprehensive relief to startups from angel tax. Startups that have been served angel tax notices can cite this notification and seek relief from proceedings.
Entrepreneurs and those funding them have complained that they have been unfairly targeted by the income tax authorities over the issue of shares at prices in excess of the fair market value.
Notices were issued under Section 56(2)(vii)(b) of the Income Tax Act. Under this, if a closely held company issues shares at a price that exceeds the fair market value, the difference will be taxed as income from other sources.
This provision, termed an anti-abuse measure, was introduced by former finance minister Pranab Mukherjee in 2012. This impacted startups as they typically follow this methodology to raise funds from angel investors, hence the name given to the levy.
Tax authorities made additions to startups’ incomes in a number of cases. Subsequently, the CBDT issued a notification excluding certain classes of investors from this provision, including startups.
However, the DPIIT said the relief provided through the notification is applicable only with regard to recognised startups where no addition under Section 56(2) has been made in an assessment order before the date of issue of the notification.
This left out those in which assessments had been completed and orders issued. “The matter has been examined by the board,” the CBDT said. “To mitigate such hardships, the central government has decided to relax the para 6 of the above referred notification issued by the DPIIT.” Startups, however, will have to furnish a declaration stating that they fulfil the conditions laid down to qualify as such entities.