Through a notification dated October 10, 2023, the Central Board of Direct Taxes (CBDT) clarified that startup companies recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) will not face scrutiny under angel tax provisions.
It was adjudged to be necessary to issue this directive and re-iterate the eligibility criteria for startups to avail of angel tax exemption after it was observed that startups were being picked up for scrutiny under CASS (Computer Aided Scrutiny Selection).
As per Section 56(2)(viib) of the Income-tax Act, 1961, the aggregate consideration received by an unlisted company for the issue of shares that exceeds the fair market value thereof shall be chargeable to income tax, under the head “Income from other sources”. Here, the consideration is taxable at the rate of 30.6%. This provision applies to situations where consideration for the issue of shares is received from resident investors. But the said Section was amended via the Finance Act, 2023, which omitted the words “being a resident” w.e.f. April 1, 2024. Accordingly, the consideration received by unlisted companies from non-resident investors in excess of the shares’ FMV will be covered by the said provision from AY 2024-25.
To date, a total of 99,380 startups have been recognised by the Department. However, the exception will apply to only those recognised startups whose aggregate amount of paid-up share capital and share premium after the issue or proposed issue of shares, if any, does not exceed Rs.25 Crores.
If such startups are picked up for scrutiny under angel tax provisions, the Assessing Officers have been directed to not proceed with verification. In case the eligible startup is under scrutiny for other issues as well, it is clarified that the issue of applicability of angel tax provisions will not be pursued during the assessment proceedings.