News

Published: October 16, 2023
Updated: October 16, 2023

CBDT Eases Angel Tax Scrutiny for Recognized Start-ups

In a significant move, the Central Board of Direct Taxes (CBDT) has issued directives aimed at streamlining the scrutiny process of funds raised by recognized start-ups under the new angel tax regime. This directive offers clarity and relief to start-ups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT).

Clarification on Angel Tax Applicability:

The CBDT has communicated to senior officials within the tax administration that assessing officers will not scrutinize recognized start-ups if they have been approved by the DPIIT and are under scrutiny for pending angel tax assessment. This means that the applicability of angel tax will not be pursued during the assessment proceedings of these recognized start- ups.

Angel Tax Explained:

Angel tax is imposed on the amount received by a company that exceeds the fair market value, treated as income. The directive focuses on the applicability of angel tax to registered start-ups in light of the new norms.

Budget 2023 Expansion:

The Union Budget of 2023 introduced changes to extend the scope of angel tax provisions to transactions involving foreign investors. Previously, these provisions applied only to local resident investors. This expansion aligns with the government's efforts to counter tax avoidance. As a result, it's estimated that over 80,000 DPIIT-registered start-ups will be exempt from angel tax.

CBDT's Clarity and Procedures:

The CBDT also clarified that if a recognized start-up is selected for scrutiny and faces multiple issues, including angel tax, the proceedings related to angel tax will be dropped. However, the directive emphasizes following due procedure for other matters associated with the selected case.

Expert Insights:

Experts of law and accounting note and laud this development, saying, "This provides much- needed clarity regarding the applicability of angel tax on registered start-ups and contributes to a litigation-free framework."

Effective Date:

The directive is based on the Finance Act of 2023, which amended Section 56(2)(VIIB), removing the words "being a resident." This change becomes effective from April 1, 2024. The CBDT's directive brings relief to recognized start-ups by streamlining the angel tax scrutiny process. With a focus on due procedure and clarity, this administrative guidance will help create a more supportive and litigation-free framework for start-ups.