DPIIT-Recognised Startups Will Not Face Scrutiny Under Angel Tax Provisions

The Central Board of Direct Taxes (CBDT) issued directives to its field officials not to carry out scrutiny of startups recognised under the Department for Promotion of Industry and Internal Trade (DPIIT) related to angel tax provisions as amended in Budget 2023-24.

Thus, assessing officers will not carry out any verification when the case is under scrutiny for pending angel tax assessment of a startup recognised by the DPIIT. The CBDT has issued this clarification after many startups raised concerns about receiving scrutiny notices for angel tax. 

CBDT’s new tax directive on angel tax for startups

Many startups raised concerns about receiving scrutiny notices for angel tax. Thus, the CBDT issued a directive stating that no verification is required for startups for notices related to the amended provisions for angel tax where scrutiny notices to startups were issued under the CASS (Computer-Assisted Scrutiny Selection). This procedure has been laid down for the assessment of startup companies recognised under the DPIIT. 

The CBDT outlined two scenarios of assessment for angel tax for DPIIT-recognised startups. The first case is where a startup company is selected for scrutiny only on the issue of applicability of Section 56(2)(viib) of the Income Tax Act. In such a case, no verification will be done by the assessing officers and contention of such recognised startup companies on this issue will be summarily accepted.

The second case is where the startup company is selected for scrutiny with multiple issues, including the issue under Section 56(2)(viib) of the Income Tax Act. Here, the assessing officers will not pursue the issue of applicability of section 56(2)(viib) of the Act during the assessment proceedings of such a startup company and pursue other issues.

What is angel tax for startups?

Angel tax is an income tax levied at a 30.6% rate when an unlisted company, such as a startup, issues shares to an investor at a higher price than its FMV (Fair Market Value). This tax was imposed only on investments made by a resident investor. It will be considered as income for the startup and subject to tax under the head ‘Income from other Sources’ for the financial year. However, the Finance Act 2023 proposed extending angel tax to non-resident investors.

Changes introduced in angel tax in Budget 2023-24.

The Union Budget 2023-24 proposed extending the angel tax provisions to transactions involving foreign investors. It was applicable to just local resident investors. However, its ambit was expanded as part of the government’s anti-tax avoidance move. 

Thus, with the latest amendment, when a startup raises funding from a foreign investor, it will be counted as income and taxable. However, the DPIIT-recognised startups were excluded from the angel tax levy. An initial estimation suggested that over 80,000 DPIIT-registered startups will not come within the tax purview.

For any clarifications/feedback on the topic, please contact the writer at mayashree.acharya@cleartax.in