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In a major relief to start-ups, Finance Minister Nirmala Sitharaman on Friday announced that Section 56(2)(viib) of the Income-tax Act shall not be applicable to a start-up registered with the Department for Promotion of Industry and Internal Trade (DPIIT).
The move is likely to give a long-demanded angel tax breather to start-ups and exempt them from scrutiny.
The stated section of the Income-tax Act lays down that any excess premium received by a closely held company upon the issue of shares (above fair market value) is liable for taxation. Analysts and experts said that Friday’s announcement provides greater clarity to start-ups on tax liability.
“Acknowledging the widespread criticism faced by the tax authorities for their enthusiasm to tax start-ups, the government has finally decided to put a full stop to it. It is a widely expected move and with an impending slowdown looming over the industry, the government has decided to absolve start-ups from being harassed by the tax authorities. Today’s decision means that once you are registered as a start-up with the DPIIT, you will not be bothered by the tax authorities,” said SR Patnaik, Partner and Head, Taxation, Cyril Amarchand Mangaldas.
Angel tax has been at the forefront of the concerns highlighted by the country’s start-up ecosystem. Sitharaman had in the Budget said that start-ups who complete all the requisite declarations will not be subject to valuation scrutiny. However, some doubts still persisted which have now been cleared with the government unabiguously saying that all DPIIT-registered start-ups will be exempted.
Dedicated cell
The government further decided to set up a dedicated cell under Member of CBDT for addressing the problems faced by start-ups. A start-up having any income-tax issue can approach the cell for quick resolution of the same, said Sitharaman.
Ashish Aggarwal, Head of Policy and Advocacy at Nasscom, said that the proposed cell should also look into the concerns of start-ups who are already under notice.
“It is immensely delightful for MSMEs (funded and bootstrapped) that the government has considered to waive off ‘angel tax’ and simplify the flow of risk capital for young companies, which will allow early-stage ventures to raise seed capital. Without a thriving early-stage ecosystem, not just the interiors industry but the economy as a whole would not realise its true potential. Furthermore, their decision to fast-track GST refunds in 30 days and CBDT’s move towards setting up a dedicated cell to address tax problems will further ease business environment,” said Srikanth Iyer, Founder and CEO, HomeLane.
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