Angel tax for start-ups

Context:

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.

Background:

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.

Section 56(2)(viib) of Income-tax Act pertains to taxing unlisted companies, including start-ups, for receiving equity investment exceeding face value. It aims to curb generation of unaccounted money.

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.

DPIIT-Recognized Start-ups: These start-ups meet the criteria set by DPIIT, which typically includes aspects like. Being recognized by DPIIT can provide various benefits and exemptions, including relief from certain innovation, scalability, and potential to create employment taxes and compliance requirements.

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.

Central Board of Direct Taxes (CBDT):

It is a statutory authority functioning under the Central Board of Revenue Act, 1963.
The CBDT is a part of the Department of Revenue in the Ministry of Finance.
Functions:
- Its functions include formulation of policies, dealing with matters relating to levy and collection of direct taxes, and supervision of the functioning of the entire Income Tax Department.
- CBDT also proposes legislative changes in direct tax enactments and changes in rates and structure of taxation in tune with the policies of the Government.
Structure: The CBDT is headed by Chairman and also comprises of six members, all of whom are ex-officio Special Secretary to the Government of India.
- Member (Income Tax)
- Member (Legislation and Computerization)
- Member (Revenue)
- Member (Personnel & Vigilance)
- Member (Investigation)
- Member (Audit & Judicial)