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Relaxed norms notified; applicable retrospectively from February 19

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The Central Board of Direct Taxes on Wednesday issued its long-awaited notification on "angel tax", exempting companies from paying income tax on funds exceeding the face value of shares it issues to residents or companies adhering to conditions specified by the Commerce Ministry in February. The notification is expected to provide relief to startups that had received demand notices from the tax department for the angel funds they raised.

At the same time, the notification is only applicable retrospectively from February 19 onwards, which means that startups that have received demand notices prior to this date would still have to go through the process of an appeal to get relief. In this case, entities are expected to follow the recognised process of filing an appeal, and tax officers have been given instructions not to initiate recovery of the assessed demand, CBDT member Akhilesh Ranjan earlier said. They have also been instructed to resolve the appeals at the earliest, he added.

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No end to woes of startups already facing tax demands

The Centre had, on February 19, through DPIIT put in place a new regime that had waived off an earlier requirement to get approval for availing 'angel tax' exemption, which was done as part of government's efforts to remove hurdles faced by startups. To effectively implement the new DPIIT regime, the CBDT has now superseded its May 2018 notification and issued a fresh one. While this move is more of a procedural notification that had to be issued to put in place the process for claiming benefits given to startups vide DPIIT notification dated February 19, it, however, does not address the woes of the startups already faced with tax demands raised by the Revenue department (cases initiated prior to February 2019).

"… the Central Government, hereby notifies that the provisions of clause (viib) of sub-section (2) of section 56 of the said Act shall not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the said consideration has been received from a person, being a resident, by a company which fulfils the conditions specified in para 4 of the notification number G.S.R. 127(E), dated 19th February, 2019 issued by the Ministry of Commerce and Industry in the Department for Promotion of Industry and Internal Trade … and files the declaration referred to in para 5 of the said notification…," stated CBDT in its notification.

According to Section 56(2) (viib) of the Income Tax Act, any excess amount received by a company for issuing shares at a higher price than the fair market value of these shares would be considered taxable income from other sources. "This is just a procedural notification, which CBDT was required to issue to put in place the mechanics for claiming benefit given to startups vide DPIIT notification dated 19 February 2019," said Rakesh Nangia, managing partner, Nangia Advisors. "This notification doesn't make any new changes addressing the woes of startups," he added.

Industry organisations had written to Prime Minister Narendra Modi in January pointing out that many startups had received tax notices in the previous months to pay a penalty on top of a 30 per cent tax on funds they raised in the last up to seven years.

Around 73 per cent of startups that had raised angel capital had received demand notices from the tax department, Sachin Taparia, founder of online citizen engagement platform LocalCircles, earlier told The Indian Express.

The changes will be applicable to over 16,000 startups already registered and recognised by the government as well, according to Ramesh Abhishek, Secretary, DPIIT. Eligible startups will receive tax exemptions on funds raised up to Rs 25 crore for shares issued or proposed to be issued to angel investors. Besides this, any money received for shares issued to a listed firm with a net-worth of Rs 100 crore or turnover of at least Rs 250 crore will also be exempted, he said earlier.