MUMBAI: The startups that have already received angel tax notices, and were kept out of the recent relaxation in norms, are set to get some relief this week, said two people with direct knowledge of the matter. This will apply to situation in which valuations were challenged or the source of funding was questioned.
The Central Board of Direct Taxes (CBDT) plans to issue a notification asking tax officers to “accept valuation certificates” submitted by the startups, they said.
The tax department had challenged investments based on valuations in startups during funding rounds. Tax officials have questioned increasing valuations even when revenue is falling or stagnant. The revenue department deems capital in excess of fair market value as ‘other income,’ which is taxable at 30%.
About 2,000 startups had received notices under the two income tax sections — 56(2)(vii)(b) and 68. The first deals with valuations–classification of funding as income or investment. Section 68 deals with unexplained credit. The CBDT clarification will help startups that have received notices under both sections, said the people cited above.
The CBDT plans to write to principal commissioners asking them to go after investorsrather than startups in cases where the source of funding looks dubious. In other cases, where the valuation has been challenged by the tax officer, the explanation of the startups should be given additional weightage, depending on other criteria, said one of the persons cited above. The CBDT will ask its tax officers to accept explanations given by startups regarding the investor’s identity.
This comes days after the tax department announced measures providing relief to startups from angel tax but left out those that have already received notices related to valuation or source of investment.
“Now that startups can get an angel tax exemption with the DPIIT (Department of Promotion of Industry and Internal Trade) February 19 notification, a fresh CBDT notification asking the tax officers to retrospectively accept the angel tax exemption certificate of startups will be beneficial and hopefully should be the end of angel tax controversy,” said Sachin Taparia, founder and chairman, LocalCircles, a social media platform.
The earlier notifications on angel tax had even omitted notices received under Section 68 and referred to the amounts involved as unexplained credit.
Experts said many investors are reluctant to submit details such as permanent account number (PAN) and bank account numbers to startups. The tax department will seek these details from investors directly and determine whether they are genuine or there is any money laundering involved, said the people cited above.
Tax experts said there could be hurdles as the notification is retrospective in nature.
“For the startups that have already received tax notices, the government can come out with a notification which can be applied retrospectively,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates. “This will help as the startups can either apply for rectification of the orders already passed or can also use this clarification to get the relief during the appeal proceedings.”
A recent survey by survey by the Indian Private Equity and Venture Capital Association (IVCA), a grouping of investors, showed that 73% of the 2,883 respondents had received angel tax notices. The startups said that they have received the notice for raising capital over the “fair market value” or for raising capital from unknown sources.