After giving an initial relief for the startups facing issues with the angel tax, the finance minister Nirmala Sitharaman has now announced that Section 56(2)(viib) of the Income Tax Act 1961 would not be applicable to the startups registered under DPIIT. Further, the minister said that the government will set up a dedicated cell under a member of CBDT for addressing problems of startups. Any startup with any income tax issues can approach the cell for quick resolution.
Section 56 (2) (vii)(b) of the Income Tax Act said that if a privately held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be taxed as income from other sources.
Due to this provision, in November 2018, the Ministry of Consumer Affairs (MCA) issued notices to more than 2,000 startups that had raised money since 2013. The notices were mostly sent to the startups whose valuations had fallen after the first round of fundraising.
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After much debate, the DPIIT and CBDT issued a notification on February 19, 2019 saying, “All the startups are allowed to receive angel tax exemption regardless of their share premium values given that the aggregate amount of paid-up share capital and share premium of the startup after issue or proposed issue of shares, if any, does not exceed, INR 25 Cr.”
At the time of notification, it was also widely discussed that a few pain points for startups remain the same: Section 68 was yet to be addressed and the certification process for the tax exemption under Section 80-IAC had been left unaddressed.
The minister of commerce and industry Piyush Goyal recently informed the parliament that the Central Board of Direct Taxes has exempted 702 startups under Section 56 (2) (vii) of Income Tax Act, 1961 till June 21.
Recently, the government had been trying to ensure that only genuine benefiting from the relaxation of angel tax rules, and if any startup fails in complying with the rules, it could be risking a severe angel tax penalty. The most recent addition to the rules includes a penalty of 200% on startups that don’t comply with angel tax requirements.
With the latest announcement, the government has further solved issues pertaining to angel tax as the startups don’t need to depend on qualifications but get a blanket exemption from the Section 56 (2) (viib) if they are a DPIIT-registered startup. However there has been no clarification on any relief measures for startups which were already under IT lens and had received notices.