Angel tax for start-ups

Recently, the Central Board of Direct Taxes (CBDT) has directed its officers to not carry out scrutiny of ‘angel tax’ provisions for start-ups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT).

What is Angle Tax for Start-ups?

• Angel tax – which is income tax at the rate of 6 per cent – is levied when an unlisted company issues shares to an investor at a price higher than its fair market value.

• Earlier the angle tax was imposed only on investments made by a ‘resident investor’.
• However the Finance Act 2023 proposed to extend angel tax even to non-resident investors from April 1, 2023.
• In a directive issued in this accordance, the tax department has asked its field officials to not do verification for the recognized start-ups for cases pertaining to Section 56 (2) (viib) of the Income-tax Act, which was amended in the Finance Act, 2023 bringing in non-resident investors also under the angel tax levy.

What are the updated provisions regarding Angle-tax for Start-ups?

• DPIIT-Recognized Start-ups Exempt from Angel Tax Scrutiny: CBDT's directive specifies that start-up companies recognized by DPIIT (Department for Promotion of Industry and Internal Trade) are exempt from scrutiny related to amended provisions of angel tax.

• Procedure for Assessment of Start-ups Outlined:
• For start-up companies under scrutiny solely for the applicability of section 56(2)(viib) of the Income-tax Act, Assessing Officers will not verify this issue during proceedings under section 143(2) or 147/143(2) of the Act.
• The contention of recognized start-ups on this matter will be summarily accepted.
• Exclusion of Section 56(2)(viib) During Multi-Issue Scrutiny: In cases where start-up companies are under scrutiny for multiple issues, including section 56(2)(viib), this specific section will not be pursued during the assessment proceedings for such start-up companies.

Provision related to Angle Tax under Finance Act 2023:

• Amendment of Section 56(2)(viib): Finance Act 2023 modified the 'angel tax' provision to include foreign investors in start-up funding taxation.
• Exemption for Recognized Start-ups: DPIIT-recognized start-ups were excluded from angel tax, sparing them from this tax liability.
• Final Valuation Rules for Investors: Finance Ministry established valuation rules, including methods like DCF, for resident and non-resident investors in unlisted companies.
• Exemption for Investors from Certain Countries: Angel tax was waived for investors from 21 countries, but countries like Singapore, Netherlands, and Mauritius were excluded.