The issue of angel tax, in which startups have been claiming that they are put to harassment by the income tax officials has figured in a notification issued by the Central Board of Direct Taxes (CBDT). The essence of this notification is that any officer in the Income Tax department cannot arbitrarily take up a startup for scrutiny in respect of angel tax which is covered under Section 56(2) (viib) of the Income Tax Act. The officer will have to first obtain approval from his /her immediate superior for the same. 

In her Budget speech in Parliament on July 5, Finance Minister Nirmala Sitharaman had assured that the government is alive to the issue thrown up by the angel tax issue, relating to the valuations of startups and investments made by angel investors and something will be done about it.

The notification has left no doubt on the matter. 

There are startups which obtain a certificate of exemption from angel tax from the Department for Promotion of Industry and Internal Trade (DPIIT). There may be others who might not have obtained such an exemption. The instruction now issued will cover both. Where the exemption exists, there will be no scrutiny under Section 56. In the case of the other startups, the permission from the superior becomes essential.

The angel tax exemption is a new phenomenon under which the DPIIT has been authorised to issue certificate of exemption to startups, where the startup is less than 10 years old. In addition, the turnover limit has been fixed at a maximum of Rs 50 crore and the share premium should not exceed Rs 25 crore. Such companies can apply and the DPIIT will automatically issue the angel tax exemption certificate.

Some startups have been claiming that despite these, the taxmen keep sending notices to them. The genesis of the issue lies in the tax department claiming that the startups are valuing their companies at a much higher level than what they really are, and that investments being made at such values should be treated as extra income in their hands and taxed as such.

Section 68 is another clause in the IT Act that is used by the tax officials to question the startups. Here, the identity of the investors is questioned. There has been a proposal to introduce an e-verification process to check the antecedents of the investors, but possibly the mechanism is yet to be put in place.