CBDT yet to set up angel tax exemption infrastructure

Prelims level : Banking Mains level : GS - III
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The Central Board of Direct Taxes (CBDT) has not started work on setting up the back-end infrastructure required to automatically exempt registered start-ups from angel tax.

The Department for Promotion of Industry and Internal Trade (DPIIT) had, last month, issued a notification that stated that registered start-ups would be exempt from the angel tax if they met certain conditions.

What is Angel Tax?

Angel Tax is a 30% tax that is levied on the funding received by startups from an external investor. However, this 30% tax is levied when startups receive angel funding at a valuation higher than its ‘fair market value’. It is counted as income to the company and is taxed.

The tax, under section 56(2)(viib), was introduced by in 2012 to fight money laundering. The stated rationale was that bribes and commissions could be disguised as angel investments to escape taxes. But given the possibility of this section being used to harass genuine startups, it was rarely invoked.

Why is Angel tax problematic?

There is no definitive or objective way to measure the ‘fair market value’ of a startup. Investors pay a premium for the idea and the business potential at the angel funding stage. However, tax officials seem to be assessing the value of the startups based on their net asset value at one point. Several startups say that they find it difficult to justify the higher valuation to tax officials.

In a notification dated May 24, 2018, the Central Board of Direct Taxes (CBDT) had exempted angel investors from the Angel Tax clause subject to fulfilment of certain terms and conditions, as specified by the Department of Industrial Policy and Promotion (DIPP) now renamed as the Department for Promotion of Industry and Internal Trade. However, despite the exemption notification, there are a host of challenges that startups are still faced with, in order to get this exemption.

About CDBT:

  • CBDT is nodal policy-making body of Income Tax (IT) department under Finance Ministry.
  • It is a statutory authority established under The Central Board of Revenue Act, 1963.
  • It is supreme body in India for framing policies related to direct taxes and is also tasked to enforce direct tax laws in the country. The composition of CBDT includes Chairman and six members.
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