The Central Board of Direct Taxes (CBDT) has geared itself towards safeguarding the interests of start-ups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT). This resolution emerged after the enactment of the updated angel tax provisions under the Finance Act, 2023, which aimed to alleviate unnecessary scrutiny imposed on these start-ups.
New Tax Directives for DPIIT Recognized Start-ups
In response to the concerns expressed by several start-ups that have fallen under the scanner for angel tax, the CBDT issued a directive to its officers. The directive ordered a halt to the scrutiny of angel tax provisions for start-ups enjoying recognition from the DPIIT. The CBDT identified two instances where these directives prove applicable:
– Single-Issue Scrutiny: If a scrutiny is initiated solely to evaluate the applicability of Section 56 (2) (viib) of the Income-tax Act, there will be no need for any verification during the assessment proceedings. The recognized start-ups’ argument regarding the issue will be promptly accepted.
– Multiple-Issue Scrutiny: In circumstances where a recognized start-up is simultaneously scrutinized for multiple issues, one of them being under Section 56 (2) (viib) of the Income-tax Act, there will be no examination of the applicability of the angel tax provision throughout the assessment proceedings.
Understanding the Angel Tax Provisions
An angel tax is a form of income tax, involving a 30.6% tax rate, applied when an unlisted company issues shares at a price greater than its fair market value. This concept initially applied solely to investments made by resident investors; however, following the Finance Act, 2023, foreign investors also fall under its purview. But, the recent directives ensure that start-ups recognised by the DPIIT are exempted from this levy.
Foreign Investor Exemptions and Government Initiatives for Start-ups
As of May 2023, the Finance Ministry has waived off the angel tax levy on non-resident investments in Indian start-ups from 21 countries, including giants like the US, UK, and France. The government has also introduced numerous initiatives such as the National Initiative for Developing and Harnessing Innovations (NIDHI), Startup India Action Plan (SIAP), Ranking of States on Support to Startup Ecosystems (RSSSE), and Startup India Seed Fund Scheme (SISFS).
The Role of the Central Board of Direct Taxes
Established by the Central Board of Revenue Act, 1963, the CBDT operates as a statutory authority. It forms a crucial part of the Department of Revenue within the Ministry of Finance, contributing to policy formulation and planning related to direct taxation in India. It also oversees the enforcement of direct tax laws through the Income Tax Department, including taxes like income tax, corporation tax, and others.
Venture Capital Explained
Venture capital is essentially a long-term start-up capital provided to new entrepreneurs. These funds usually stem from venture capital firms that specialize in creating financial portfolios based on high-risk ventures. The money is invested in exchange for equity in the start-up itself. Known as venture capitalists, these investors take on the risk of losing their investment if the venture does not succeed. Venture capital investments are often referred to as risk capital or patient risk capital due to the inherent risk involved and their medium to long term investment horizon.
