Angel Tax on Start-ups

18 Oct 2023 Angel Tax on Start-ups

This article covers “Daily Current Affairs” and the topic details “Angel Tax on Start-ups”. This topic has relevance in the Economy section of the UPSC CSE exam.

For Prelims:

Updated Provisions for Angel Tax and Start-ups?

Central Board of Direct Taxes (CBDT)?

For Mains:

GS 3: Economy

Provisions Related to Angel Tax Under Finance Act 2023?

Why in the news?

In response to notices sent to start-ups, the Central Board of Direct Taxes (CBDT) has issued a directive instructing its officers not to conduct scrutiny of angel tax provisions for start-ups that have received recognition from the Department for Promotion of Industry and Internal Trade (DPIIT).

Background

• Previously, angel tax only applied to investments made by “resident investors.” The Finance Act of 2023 extended angel tax to non-resident investors, effective from April 1, 2023.
• In response to this change, the tax department issued a directive to its field officials. The directive instructed officials not to conduct verifications for recognized start-ups in cases related to Section 56(2)(viib) of the Income-tax Act.
• Section 56(2)(viib) of the Income-tax Act has been amended in the Finance Act of 2023 to include non-resident investors under the angel tax levy. This section is relevant to the taxation of unlisted companies, including start-ups, when they receive equity investments exceeding the face value.
• The primary goal of this amendment is to prevent the generation of undisclosed or unaccounted money.

Updated Provisions for Angel Tax and Start-ups:

• The directive from the CBDT states that start-up firms acknowledged by the DPIIT (Department for Promotion of Industry and Internal Trade) will not be subject to scrutiny concerning the revised angel tax provisions.

DPIIT-Recognized Start-ups:

• DPIIT-Recognized Start-ups meet specific criteria set by the Department, including factors related to innovation, scalability, and employment generation.
• Recognition by DPIIT provides various benefits and exemptions, including relief from certain taxes and compliance requirements.

Procedure for Assessment of Start-ups Outlined:

• For start-up companies solely under scrutiny for section 56(2)(viib) of the Income-tax Act, Assessing Officers will not verify this issue during proceedings under section 143(2) or 147/143(2) of the Act.
• The contentions of recognized start-ups on this matter will be summarily accepted.

Exclusion of Section 56(2)(viib) During Multi-Issue Scrutiny:

• In cases where start-up companies are under scrutiny for multiple issues, including section 56(2)(viib), this specific section will not be pursued during the assessment proceedings for such start-up companies.

Provisions Related to Angel Tax Under Finance Act 2023:

• Amendment of Section 56(2)(viib): The Finance Act 2023 brought about an amendment to Section 56(2)(viib) to expand the scope of ‘angel tax’ provisions. This modification included foreign investors in the taxation of start-up funding.
• Exemption for Recognized Start-ups: Start-up companies recognized by DPIIT were granted an exemption from the angel tax. This exemption spared them from the tax liability associated with angel tax.
• Final Valuation Rules for Investors: The Finance Ministry introduced final valuation rules applicable to both resident and non-resident investors in unlisted companies. These rules involved valuation methods such as the Discounted Cash Flow (DCF) method.
• Exemption for Investors from Certain Countries: Angel tax exemptions were extended to investors from 21 countries. However, some countries like Singapore, Netherlands, and Mauritius were excluded from these exemptions.

Central Board of Direct Taxes (CBDT):

• CBDT operates as a statutory authority in accordance with the Central Board of Revenue Act, 1963.
• CBDT is a component of the Department of Revenue, situated within the Ministry of Finance.

Functions:

• Formulation of Policies: CBDT is responsible for the formulation of policies related to direct taxes.
• Levy and Collection: It deals with matters concerning the levy and collection of direct taxes.
• Supervision: CBDT supervises the overall functioning of the Income Tax Department.

Policy Proposals:

• CBDT has the authority to propose legislative changes in direct tax enactments.
• It also suggests modifications in tax rates and the structure of taxation, aligning them with the government’s policies.

Structure:

• The CBDT is headed by a Chairman.
• Members: It comprises six members, all of whom serve as ex-officio Special Secretaries to the Government of India. These members include:
  • Member (Income Tax)
  • Member (Legislation and Computerization)
  • Member (Revenue)
  • Member (Personnel & Vigilance)
  • Member (Investigation)
  • Member (Audit & Judicial)

Source:Angel tax for start-ups: What CBDT has clarified after scrutiny notices | Explained News – The Indian Express

Download Yojna daily current affairs eng med 18th Oct 2023

Q.1 Consider the following statements regarding the Central Board of Direct Taxes (CBDT):

1. CBDT operates as a statutory authority.
2. The Chairman of CBDT is also designated as the Special Secretary to the Government of India.

Which of the statements given above is/are correct? 

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

ANSWER: C

Q.2 Regarding the updated provisions for angel tax and start-ups, which of the following statements:

1. DPIIT-recognized start-ups are not subject to scrutiny related to the revised angel tax provisions.
2. DPIIT recognition primarily depends on a start-up’s ability to generate high profits.

Which of the statements given above is/are correct? 

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

ANSWER: A

Q.3 Discuss the recent provisions introduced by the CBDT (Central Board of Direct Taxes) regarding angel tax and their impact on start-ups in India. How do these provisions aim to encourage innovation and ease the taxation burden on the start-up ecosystem?

rishabh