In response to Inc42’s RTI on the number of startups that have been served notices under the angel tax provision and Section 68, all the regional circles of the I-T Department responded with ‘NIL’ information
The absence of a specific category for identifying DPIIT-recognised startups in the income tax database hinders the availability of relevant data
Introduced in 2012, Section 56(2) (viib), infamously called as angel tax, aims to to discourage shell companies and black money circulation but has adversely affected startups, leading to closures, financial strain, and prolonged legal battles
The Income Tax Department (I-T Department) has said it has no data pertaining to the number of DPIIT-registered startups that have been impacted by angel tax and Section 68 of the I-T Act.
In response to Inc42’s RTI on the number of startups that have been served notices under Section 56(2) (viib), now infamously called the angel tax, and Section 68, all the regional headquarters and circles of the I-T Department responded with ‘NIL’ information.
Introduced in 2012, Section 56(2) (viib) of the I-T Act – income from other sources – was meant to be an anti-abuse law to discourage shell companies and black money circulation. The tax is payable on capital raised by unlisted companies if the value of the shares issued to investors exceeds their fair market value (FMV). However, over the years this provision has become a stumbling block for the Indian startups.
Meanwhile, Section 68 of the I-T Act acts as a safeguard against the misuse and distribution of undocumented funds. It mandates a uniform tax rate of 60%, which is further augmented by additional surcharges and cess, culminating in an effective tax rate of around 78%. This section also opens the door for potential penalties, placing both investors and startup founders in a position of significant risk.
Data For Startups Not Maintained Separately
In the response to Inc42’s RTI request, the Central Public Information Officers (CPIO) of the I-T Department said that the department does not maintain the data for startups separately. Hence, none of the regional headquarters of the department have information about the number of startups that have been sent notices under Section 56(2)(viib) and Section 68.
Similarly, the department does not have the data pertaining to the number of cases related to Section 56(2)(viib) and Section 68 that are currently pending with the Income Tax Appellate Tribunal (ITAT).
The Bidar, Karnataka Ward of the I-T Department too said that information pertaining to startups is not maintained separately and added that the sought details would “disproportionately divert the resources”.
“After implementation of Faceless Assessment Scheme-2019, the assessment proceedings are conducted in (a) faceless manner by the National Faceless Assessment Centre. The information sought can be compiled only by verification of a large number of assessment records for various assessment years completed and pending, which would disproportionately divert the resources of this public authority,” it said in its written response.
Meanwhile, the Chennai office of the I-T Department said that there is no category for the identification of the startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) in the Income Tax Returns (ITRs).
“In the absence of any such data in the income tax database, the same is not available with the office. Therefore, no data on the queries raised in the petition are available,” said the RTI response shared by the Chennai office.
However, it must be noted that the Central Board of Direct Taxes (CBDT) has added a separate column in ITR 5 and ITR 6 to identify if a company filing ITR is DPIIT-recognised or not
The Unending Angel Tax Saga
Despite multiple assurances from the government over the years, the angel tax issue continues to plague Indian startups. While a number of startups have suffered due to angel-tax-related issues, the seizure of their bank accounts by the I-T Department also resulted in shutdowns in many cases.
Several angel tax-related cases were reported widely between 2017 and 2019. Most of the cases went on for several quarters with no clarity in sight. In 2019, Inc42 reported dozens of cases in which startups claimed refunds against angel tax.
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.
Amid uproar from the startup ecosystem, the DPIIT, in a notification issued on April 11, 2018, stated that certain shortlisted startups could skip the angel tax bump during their startup ride.
The DPIIT and CBDT issued another 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.”
However, only around 8,000, or 7%, of the 1.15 Lakh startups registered with the DPIIT have been exempted from the angel tax. In response to an earlier RTI filed by Inc42, the DPIIT said that between April 1, 2019, and September 26, 2023, 10,809 DPIIT-recognised startups applied for the exemption, yet only 8,066 were granted exemption.
Amid all these, the issue of angel tax continues to haunt Indian startups time after time.