Startups to get angel tax relief retrospectively from Feb 19; here are new norms notified by CBDT

The government in February relaxed the definition of startups in a bid to encourage budding entrepreneurs, and allowed them to avail full angel tax concession on investments worth up to Rs 25 crore. Following that up, the income tax department recently notified the modified norms for startups to enable them to seek this exemption. The modified norms will be effective retrospectively from February 19, when the Department for Promotion of Industry and Internal Trade (DPIIT) made the announcement.

The Central Board of Direct Taxes (CBDT) will implement the detailed framework provided by the DPIIT and issued a new notification on Tuesday to clarify matters. Significantly, the latter stated that the provisions of Section 56 (2)(viib) of the Income Tax Act won't apply to consideration received by a company for the issue of shares in excess of their face value if these funds have been received in accordance with the conditions put in place by the DPIIT, The Economic Times reported.

For the record, this section provides that the amount raised by a start-up in excess of its fair market value would be deemed as income from other sources and would be taxed at 30%. It was introduced as an anti-abuse measure in 2012 by then finance minister Pranab Mukherjee but came to be known as angel tax due to its impact on investments made by angel investors.

Earlier, the investment limit for a startup to seek exemption under this section was Rs 10 crore and they were permitted to avail the benefits only for seven years. The DPIIT on February 19 raised the investment limit for 'angel tax' exemption to Rs 25 crore and extended the period of availing benefits to 10 years for start-ups. To avail the exemption, a startup will be required to submit a self-declaration about the use of the raised amount to the DPIIT, which will be forwarded to the CBDT.

According to Nangia Advisors (Andersen Global) Managing Partner Rakesh Nangia, this is just a procedural notification which the CBDT was required to issue to put in place the mechanism for claiming benefit given to startups by the earlier DPIIT notification.

This development came about after several startups said they had received notices under Section 56(2)(viib), which was impacting their businesses. With regard to such cases where tax demands have been raised, the CBDT has already asked the field formations to expeditiously clear them.

With PTI inputs