In a significant development towards the alleviation of startup tax scrutiny, the Central Board of Direct Taxes (CBDT) has revealed its strategy to tackle outstanding angel tax assessments. This move was catalyzed by announcements made by the Finance Minister during the Budget 2019-20, which advocated for numerous incentives, like resolutions for ongoing income tax case assessments to foster startup growth.
New Procedure Laid Out by CBDT
On the basis of the announcements, the CBDT has designed a new procedure according to which, if a startup is recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) and has been selected under limited scrutiny, the assessing officer shall not perform any verification. However, in scenarios where the startup doesn’t have DPIIT approval, the officers can only proceed with inquiries or verifications upon receiving approval from their supervisory officer.
Implications for DPIIT Recognized Startups
For startups that are DPIIT recognized but subject to multiple issue scrutinies, officers cannot proceed under an anti-evasion provision of the Income Tax Act, 1961, during the assessment proceedings. Specifically, Section 56(2)(vii)(b) of the Income Tax Act, 1961, which pertains to the taxation of share premiums received beyond the fair market value, will not apply. In the past, this section has been invoked to issue demand notices to startups concerning the angel capital they raised.
| Fact | Description |
|---|---|
| Angel tax | Tax on share premiums received beyond the fair market value |
| Section 56(2)(vii)(b) | Section of the Income Tax Act, 1961 dealing with angel tax |
| DPIIT | Department for Promotion of Industry and Internal Trade |
| CBDT | Central Board of Direct Taxes |
Steps by the Indian Government to Curb Tax Terrorism
In a bid to address longstanding taxpayer grievances and reduce tax-related litigation, the Government of India has raised the threshold monetary limits for filing Departmental Appeals at different stages as of July 2018. Additional measures include the introduction of the Goods and Services Tax, the implementation of the Insolvency and Bankruptcy Code, and the launch of the “Kardaata e-Sahyog Abhiyaan” initiative by the CBDT.
