Angel Tax on Start-ups

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).


  • 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.


  • 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.


  • 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




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




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?


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