Startups freed from angel tax blues

The government has clarified that provisions for relaxation from angel tax also applies to companies that had received assessment orders before February 19, 2019.

While the clarification issued by the finance ministry last week mentioned clearly that startups compliant with norms laid down by the department for promotion of industry and internal trade (DPIIT) can contend that they are exempt from the clause with the assessment officers, it had not clarified whether it applied to companies where assessment orders were issued before the February 2019 notification. 

In the February notification, DPIIT had relaxed norms for startups seeking exemption from clause 56 (2) (viib) of Income Tax Act, dubbed Angel Tax.

These provisions laid down the procedure for companies seeking exemption from angel tax for registration with DPIIT. However, there was no clear directive issued by the Central Board of Direct Taxation (CBDT) to officers on dealing with such cases. 

“It is a proactive and welcome step by the government to resolve angel tax issues faced by the startups. In respect of cases which are now pending before the appellate authorities, the CBDT clarification will help the company defend its case before such authorities,” said Lokesh Shah, partner at law firm L&L Partners. 

The clause pertaining to angel tax treats early stage investments in startups at a premium valuation as income from other sources and tax them at 30% on par with corporate tax.