The Central Board of Direct Taxes (CBDT) will in a week clarify the rules of taxation of startups that will give genuine new age firms relief from taxation of share premium.
A government official said the tax authority is reviewing suggestions from businesses in consultation with the department for promotion of industry and internal trade (DPIT) to further clarify how a distinction will be drawn between genuine startups and shell companies engaging in money laundering.
Startup companies say the best solution is to exempt taxation of share premium that is beyond fair market value in the first ten years of the company’s existence. They say this could be made applicable to those with paid up capital and share premium upto ₹25 crores after the share issue, up from ₹10 crores now.
CBDT clarified on Friday night that not all tax demands to startups are issued under section 56 (2) (viib) of the Income Tax Act, the controversial ‘angel tax’ provision. It said that businesses are given the benefit of doubt as well as the opportunity to submit documents showing their status as a genuine start up.
Citing the instance of tax recovery in one such case, CBDT said, “..The action of the assessing officer of enforcing recovery of demand is not in violation of CBDT’s instructions. Notwithstanding the above, the benefit of doubt should and must be given to our entrepreneurs. However, when after repeated reminders, records of funds received are not provided, the Department is unfortunately left with no other choice. It is also our duty to prevent and expose suspected evasion," said the CBDT statement.
Section 56 (2) (viib) introduced in the Income Tax Act in 2012 subjects share premium that is above the fair valuation of shares to tax treating it as “other income." Since startups derive high valuation based on the strength of their business model, rather than their assets, differences arise between the companies and tax officials about the share valuation, leading to disputes.
CBDT had in January simplified the process for startups seeking exemption from angel tax notices by eliminating the need for a certification from an inter-ministerial body. Instead, they were to route such applications through DPIT to CBDT. But many companies are not happy and insist on getting a more lenient tax regime.