Budget 2019: No clarity on ‘angel tax’; committee to look at pending cases

Even as the startup ecosystem hoped that the scourge of ‘angel tax’ will be done away with, the government’s announcement preventing scrutiny on valuations and share premiums provided only temporary relief. 

Finance minister Nirmala Sitharaman, while presenting her maiden budget today,  announced that startups and investors filing requisite declarations and providing information in their returns will not be subject to scrutiny on valuations or share premiums. 

The government has also directed Central Board of Direct Taxes (CBDT) to form a committee to evaluate pending assessments of startups served with notices under ‘angel tax’ and address grievances. 

However, it does not directly address whether exemption letters granted by CBDT to startups registered with the Department for Promotion of Industry and Internal trade (DPIIT) will be valid on tax notices issued to these companies before the letters were granted. 

Some companies had earlier claimed that their appeal on these orders were held up as tax department cited lack of clarity on validity of exemption letters retrospectively.

“There is no mention of the impact of the announcement in retrospective,” said Sreejith Moolayil, cofounder of health food brand True Element,  who was among a group of startups that were part of stakeholder meetings with DPIIT and CBDT from December 2018 to earlier this year. 

“The CBDT committee will add another layer of bureaucracy, similar to the inter-ministerial board which was disbanded post the February 19 notification. The approval rate of the board was 3% and we are likely to be stuck again with the same.” 

DPIIT had issued a notification on February 19 which sought to ease the norms around ‘angel tax’ or Section 56(2) (viib) which treats early stage investments in startups as ‘income from other sources’ taxed at 30% on par with corporate taxation structures. 

Close to 80 startups were issued notices for the assessment year 2016-17 in December 2018 for raising funds from family, friends, and investor networks not registered with the market regulator as Alternate Investment Fund - I, especially if the company’s valuation was higher than the market value.

"There is no statutory backing to the notifications already issued by CBDT on dealing with ‘angel tax’ issues. It will continue to remain a challenge for companies in the absence of the same," said Pranay Bhatia, Tax Partner at BDO India.  

Budget 2019 also increased the scope to networks registered as AIF-I or AIF-II with market regulators, sparing companies raising capital from further tax scrutiny on valuations.

“We are seeing instances where despite the exemption letter, tax authorities have been reaching out to companies,” Rajat Tandon, president of Indian Private Equity and Venture Capital Association (IVCA) told TechCircle.

 "lVCA along with TiE has reached out to these companies to submit their concerns to DPIIT for a hopeful outcome."

In a statement, executive chairman of TiE Delhi-NCR, Geetika Dayal said, “The confusion continues among startups who are currently impacted, and the proof of the pudding will be if their concerns are resolved rapidly.”