Startups Risk 200% Penalty On Failing To Follow Angel Tax Rules

After continuous efforts to ease the angel tax burden on startups and investors, the government is now tackling the issue of money laundering through shell companies with a strict hand. The government is on a mission to ensure that only genuine startups are 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.

For this, the government has introduced an amendment to the Finance Bill passed by the Lok Sabha on Thursday (July 18). The change includes a penalty of 200% on startups for not complying with the government’s conditions while availing angel tax exemption under Section 56 (2) (vii).

The penalty pertaining to under-reporting of income is aimed at deterring the misuse of angel tax exemption, allowed in the Budget for FY20. The Bill will now go to the Rajya Sabha, which cannot make changes to it.

Further, the conditions laid down by the Department of Promotion of Industry and Internal Promotion (DPIIT) include:

• Startups need to attest that they have not invested in any unused land, any vehicle over Rs 10 lakh in value, and in jewellery, among others
• Startups are also not permitted to give loans and advances

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.

The development comes in lieu of the notice issued by DPIIT on February 19, 2019. The notice said: “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.”

Presenting the Union Budget 2019, Finance Minister Nirmala Sitharaman said that the startup ecosystem is key to India’s economy and its growth needs to be encouraged.

“To resolve the so-called ‘angel tax’ issue, startups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums,” the FM said.

“The issue of establishing the identity of the investor and source of his funds will be resolved by putting in place a mechanism of e-verification. With this, funds raised by startups will not require any kind of scrutiny from the Income Tax Department,” Sitharaman added.