Startups Now Need To Be Certified By Ministerial Panel To Be Exempted From Tax


Startups that seek exemption from the so-called angel tax may now have to be certified by an inter-ministerial board to be eligible for tax relief, reports Economic Times


The difference between a startup’s worth as estimated by investors at the time of funding and its fair value as assessed by tax authorities is considered to be income and deemed taxable under section 56(2)(vii)(b) of the Income Tax Act, 1961. 

The background

In June 2016, the Central Board of Direct Taxes (CBDT) had assured that the companies that have been certified as startups by the Department of Industrial Policy and Promotion (DIPP) would not be taxed on investments that they have raised as a premium to their fair value.

Yet again, in February,  CBDT asserted no coercive actions would be taken against DIPP-certified startup. It also claimed that authorities would do away with all tax-related appeals raised by such startups by March 31.

However, the problem has arisen because a recent DIPP-issued kit for certified startups has not clearly mentioned if all startups would be needing to have IMB certification to be exempted from angel tax.

A government official who chose to stay anonymous said that for the startups to get any tax-related benefits, be it angel tax or income tax, they need to be certified by an inter-ministerial board that judges startups on the degree of their innovation.

However, as Rohan Deshpande, an independent lawyer practicing at the Bombay High Court, has pointed out, the June 2016 and February notifications add up to a different meaning. They read up to say, “do not mandate the requirement of an IMB certification for availing of protection from angel tax under section 56 of the IT Act… Additionally, as per CBDT guidelines, startups that fall within the DIPP notification of May 23, 2017, will not be assessed for angel tax under section 56.” 

The flip side of the story

In spite of the CBDT giving assurance that no coercive actions would be taken to recover the outstanding tax money, startups like that of InstaLively, which has been acquired by Hike Messenger have been receiving tax notices.

Prabhakar Khaduja, co-founder, InstaLively, said, “The tax authorities do not understand what a startup is. We had a valuation certificate based on the prescribed discounted free cash flow method but the assessing officers were inclined on valuing us on profit and loss.”

A CBDT spokesperson has said that appeals by the several startups are under consideration and would be disposed of as soon as possible.

Also Read: Govt. Soon To Modify Angel Tax For Startups!