A large number of startups that have recently faced tax demands are unlikely to get any relief as demands were made under different provisions of the law. (Mint)
A large number of startups that have recently faced tax demands are unlikely to get any relief as demands were made under different provisions of the law. (Mint)

Angel tax relief likely for startups, but it may not be enough

  • Startups may face tax notices for unexplained fund receipts, treated as taxable income under Section 68 of Income Tax Act
  • Angel tax is levied on startups that receive an equity infusion in excess of their 'fair valuation'

Bengaluru/New Delhi: Only startups that have received tax demands under the specific angel tax provision may get relief once the government notifies new rules easing the tax burden on new ventures, a government official said.

A large number of startups that have recently faced tax demands are unlikely to get any relief as demands were made under different provisions of the law, the official said, requesting anonymity.

Last week, the income tax department allegedly deducted 33 lakh and 72 lakh from the bank accounts of startups Travelkhana.com and Sheroes-owned Babygogo, respectively, though Ramesh Abhishek, secretary of Department for Promotion of Industry and Internal Trade (DPIIT), had said no coercive action would be taken against startups that have received tax notices.

Startups may still face tax notices for unexplained fund receipts, which are treated as taxable income under Section 68 of the Income Tax Act, 1961, the official clarified, adding there is no blanket exemption.

“Many startups are trying to project their unexplained fund receipts that the department has questioned as cases of angel tax or taxing of share premium above fair market valuation under Section 56 (2) (viib) of the Income Tax Act," the official said.

The Central Board of Direct Taxes (CBDT) is expected to extend within the next two days angel tax exemption to companies with paid-up capital and share premium of up to 25 crore, according to two people familiar with the matter.

Angel tax is levied on startups that receive an equity infusion in excess of their “fair valuation" and the premium paid by investors is treated as income, taxable at 30%.

The tax relief will be available only to entities registered with the DPIIT.

“Some startups have not submitted certificates from the angel investor showing his credentials and PAN which are required for a tax official to be satisfied about the source of funds. There is a reluctance on the part of some startups to submit such a certificate which results in taxation of unexplained funds," the official added.

Startup founders claimed the information demanded from them could be easily found in the tax department’s database. “Some of the angel investors who invest in startups are high-profile people who would not want to share their income tax returns," said Pushpinder Singh, founder of Travelkhana.com. “But with PAN details, tax officials can pull those documents out without us having to submit them." The company’s accounts have been unfrozen and it has a hearing with the Commissioner of Income Tax (Appeals) on 5 March, according to Singh.

In December, several startup entrepreneurs received tax notices to pay tax on funds raised by them in assessment year 2015-16. According to industry estimates, around 75% of these startups received tax notices under Section 56, while the remaining ones received notices under Section 68.

“The upcoming relief will solve for angel tax but is not expected to solve for Section 68 under which source of funds is scrutinized by the assessing officer," said Sachin Taparia, founder of LocalCircles, which had submitted suggestions on this issue with the CBDT and DPIIT.

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