No angel tax scrutiny for DPIIT-Recognized start-ups: CBDT tells officers

The Central Board of Direct Taxes (CBDT) has issued a direction to its field agents directing them not to submit startups to inspection for the angel tax rules, as amended in the Budget for 2023–24. Startups have been recognized by the Department for Promotion of Industry and Internal Trade (DPIIT). The concern voiced by businesses that received notifications of potential inspections for paying the angel tax led to this move.

Angel tax is a 30.6% income tax imposed on unlisted companies when they issue shares to investors at a price higher than the fair market value. Previously, it applied only to investments made by resident investors, but the Finance Act 2023 proposed extending it to non-resident investors starting from April 1, 2024.

The CBDT's circular clarifies the angel tax's applicability to registered firms and acts as administrative counsel for field officers. The directive states that the Assessing Officers (AOs) should not conduct any verification on this issue during the assessment proceedings under Section 143(2) or Section 147/143(2) of the Act if a recognized startup's case is chosen for scrutiny solely on the issue of the applicability of Section 56(2)(viib) of the Income-tax Act. Instead, they must categorically embrace the argument of such reputable startup enterprises.

This directive also applies to situations involving several difficulties under Section 56(2)(viib) of the Income-tax Act, which are covered by scrutiny. Fundamentally, it means that firms registered with DPIIT and whose cases are taken up for angel tax issues won't be subjected to assessment proceedings, and the AOs must give these startups a clean bill of health.

Section 56(2)(viib), commonly referred to as the 'angel tax,' was introduced in 2012 to discourage the use of unaccounted money in closely held companies. It stated that when an unlisted company, especially a startup, receives equity investment from a resident that exceeds the face value of shares, it would be treated as income for the startup and subject to income tax under 'Income from other Sources' for the relevant financial year.

The most recent change expanded the application of the angel tax to overseas investors, which means that when a company raises money from a foreign investor, that money will also be regarded as income and subject to taxation. Startups recognized by the DPIIT were excluded from the angel tax levies, nonetheless.

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