The Income Tax Department has issued a clarification to its field formations, exempting startups registered with the Department of Promotion for Industry and Internal Trade (DPIIT) from scrutiny concerning angel tax. This decision comes in light of recent notices received by startups with non-resident investors, primarily focusing on the valuation of investments made by non-residents. The directive emphasizes that startups registered with DPIIT will not undergo scrutiny for angel tax, but other issues mentioned in the notice may still be examined by tax department officers. Furthermore, any contentions raised by these startups will be summarily accepted.
Relief for Startups Amid Funding Challenges
This clarification offers much-needed relief to startups, which are already grappling with a challenging funding landscape. It aims to alleviate the burden of angel tax-related scrutiny, particularly for startups with non-resident investors.
Background: Angel Tax Provision
The angel tax provision, found in Section 56(2)(viib) of the Income Tax Act, 1961, pertains to the taxation of the excess consideration received by unlisted companies concerning shares issued over and above the fair market value. Originally, this provision only applied to local investors.
However, the Union budget of 2023 extended the scope of the angel tax provision to include non-resident investors, effective from April 1, 2024. Consequently, non-resident investors would be subject to a tax liability exceeding 30% if shares were issued at a price exceeding the fair market value.
Following this amendment, startups received notices under Section 143(2)/147 as part of the Computer-Assisted Scrutiny Selection process, where the Assessing Officer would request further details regarding the applicability of angel tax.
Significance of the Latest Clarification
The clarification issued by the Income Tax Department provides relief for DPIIT-registered startups. These startups, having received notices related to angel tax, can expect that their contentions will be accepted, and the tax department will no longer pursue the issue. This move is welcomed as it addresses some of the challenges that DPIIT-registered startups have faced regarding angel tax. Additionally, it allows the tax department to focus on more critical issues, while DPIIT-registered startups are spared needless challenges from tax authorities.
