SUMMARY
Angel investors will be asked to give details of their investments in unlisted companies
The tax returns will help tax department differentiate shell companies from startups
Over 135 startups have now received exemption from assessment notices under Section 56(2)(viib) of the Income Tax Act
The Income Tax department continues to explore options to untangle the issues faced by startups due to angel tax. In its latest step, the department is reportedly looking to mandate disclosure of holdings in unlisted companies in tax returns of angel investors.
This would then be compared with the filings of startups, which have been asked to disclose the list of investors along with some of their details. In turn, the government’s concern of shell companies being used to launder black money also gets a solution as the two-way investment and funding disclosures will highlight the shell companies.
The report further said that with the two sets of data in their possession, tax authorities need not approach investors with notices. The new filing mechanism for startups is reportedly part of the government’s strategy to ensure faceless assessment so that there is no undue scrutiny of honest taxpayers.
The active pursuit of angel tax comes after the DPIIT notified changes in Section 56 (2) (viib) of the Income Tax Act, 1961 in the February 19 notification. According to the new notification:
- Startups will continue to be considered as startups till a period of 10 years since their incorporation. Turnover of the entity for any of the financial years since incorporation/registration has not exceeded INR 100 Cr.
- All the startups are liable 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 share, if any, does not exceed, INR 25 Cr.
After the February 19 notification, the Central Board of Direct Taxes said that startups which received assessment notices under Section 56(2)(viib) of the Income Tax Act (I-T Act) will be exempt from Angel Tax if they comply with the February 19 notification.
As part of this, the income tax department had informed around 120 startups that they are eligible to receive an exemption from paying angel tax on the funding raised from angel investors. An Inc42 source had later confirmed that over 135 startups have now received this exemption.
In one of the other steps to support angel investors, the Department for Promotion of Industry and Internal Trade (DPIIT) was exploring a definition of ‘accredited investors’, who could be provided tax incentives for investments in startups.
The accredited investor is being created as a new definition to include trusts, individuals, the family member of a startup and unlisted companies, and hence, enable them to get exemption from angel tax under Section 56(2)(viib) of the Income Tax Act, 1961, beyond the INR 25 Cr limit.
According to Inc42 DataLabs, in 2016, the number of early-stage investment deals stood at 624 — the highest between 2014 and 2018. However, in 2017, this number decreased by 11.69% to 551, and in 2018, it fell by a whopping 46.95% to 331 as compared to the base year 2016
In 2018, the case got worse after both startups and investors received a slew of tax notices from the Central Board of Direct Taxes (CBDT). With February 19 notification and continued engagement of stakeholders and government bodies, the angel tax infrastructure in India may see a new jump in 2019.
[The development was reported by ET.]
