No angel tax scrutiny for DPIIT-recognised start-ups: CBDT

Startups registered with DPIIT will not be subject to assessment proceedings relating to Angel Tax amendments made in Budget 2023.The Income Tax Department had last month notified new angel tax rules for evaluating the shares issued by unlisted startups to investors.While previously the angel tax - a tax levied on capital received on the sale of shares of a startup above the fair market value - was applicable only to local investors, the Budget for the 2023-24 fiscal (April 2023 to March 2024) widened its ambit to include foreign investments.There are 99,380 start-ups recognised by the DPIIT (Department for Promotion of Industry and Internal Trades). CBDT is the apex policy-making body for Income Tax.
Angel tax (income tax at the rate of 30.6 per cent) is levied when an unlisted company issue shares to an investor at a price higher than its fair market value (FMV). Earlier, it was imposed only on investments made by a resident investor, but Finance Act, 2023, brought in an amendment to bring consideration received from non-residents for the issue of shares by an unlisted company within the ambit of section 56(2)(viib) of the Income-tax Act, 1961. This section prescribes that if such consideration for the issue of shares exceeds the Fair Market Value (FMV) of the shares, it shall be chargeable to income tax under the head ‘Income from other sources’. This will come into effect from Assessment Year 2024-25.
CBDT highlighted that as DPPIT-recognised startups are exempted from section 56(2)(viib) of the Income Tax Act, it is necessary to clarify the action in case such a start-up is picked up for scrutiny under CASS (Computer-Assisted Scrutiny Selection). The communication said: “Where the case of such start-up company is selected under scrutiny on the single issue of the applicability of section 56(2)(viib), no verification on such issues shall be done by the Assessment Officers under the proceedings under section 143(2) or 147/143(2) of the Income Tax Act and contentions of such recognized start-up companies on the issues will be summarily accepted.”