In her first maiden speech, Madam Finance Minister announced that special administrative arrangements shall be made by Central Board of Direct Taxes (‘CBDT’) to address the grievances of start-ups, primarily being the ‘angel tax’. Furthermore, the Finance Minister promised that e-verification mechanism shall be put in place to avoid unwarranted tax scrutiny of start-ups.
To understand the roadmap for this, the Press Trust of India approached the Chairman of CBDT Mr P. C. Mody, who clarified that “As the head of the family, I can definitely assure the start-ups that there would not be any occasion for them to agitate or have any misgivings. They can just concentrate on doing their business”. He even mentioned that in the case of pending assessment, CBDT proposes to appoint dedicated officers to carry out the investigation and that it would be done in consultation and with prior approval of the supervisory officers.
With this backdrop, the Government has marked its intent on ensuring ‘ease of doing business’ for Indian start-ups which has been appreciated widely. However, while reading fine print of the Budget, no amendments regarding ‘angel tax’ have been brought in the income tax law. The implementation of the promises made by the Finance Minister is still unclear and has been left onto the tax bureaucrats. Hence, how and when would these be fulfilled is still a big question. Therefore, at the current stage, the Government has maintained a status-quo on the ‘angel tax’ issue.
Moving further, the Government has exempted Venture Capital Undertaking (VCU) from the rigors of ‘angel tax’ receiving investment from Category II - Alternative Investments Fund (AIF). However, eligible start-ups are not exempted yet, as the corresponding change is not brought in the definition issued by the DPIIT vide notification dated 19 February 2019. This is an anomaly and hence, one can only hope for an amendment in the said notification to achieve the desired objective.
Another amendment which has been brought in the income tax law is that where an eligible start-up fails to meet any of the conditions mentioned in the DPIIT notification, the consideration received in excess of face value would be taxed in the hands of the start-ups (i.e. bringing back the 'angel tax' provision). However, DPIIT revokes the angel tax exemption only if the consideration received is invested in specified assets. This amendment is draconian as it would trigger even if the eligible start-up crosses threshold limit of INR 25 crores of share capital (one of the condition prescribed by DPIIT for availing 'angel tax' exemption). Hence, it would be highly imperative for the Government to bring in the related clarification at the earliest possible.
Other fundamental changes brought in the income tax law is relaxation of conditions for carry forward and set-off of losses for start-ups and extension of time period for capital gains exemption to encourage investment in the start-ups. Welcome steps indeed!
To conclude, with a vision to have 50,000 eligible start-ups by year 2024, it is highly necessary for the Government to bring in more conducive tax provisions for start-ups with greater clarity in line with the tax practices followed by overseas jurisdictions that would enable the Indian start-up ecosystem.
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