Conditions laid down by the Department of Promotion of Industry and Internal Trade (DPIIT) in February require start-ups to attest that they have not invested in any unused land, any vehicle over ₹10 lakh in value, and in jewellery, among others. Besides, the start-up is not allowed to extend loans and advances.
In case of non-compliance, the Budget has proposed imposition of angel tax on an amount exceeding the face value of shares during the year non-compliance, with stipulated conditions. Now, fair market value will be accounted for.
“Start-ups need to be careful while availing exemption under Section 56(2)(viib) of the Income Tax Act. If conditions are not complied with, apart from charging the difference between fair value and the sales consideration as income, penalty for misreporting will also be levied. So, even if a start-up is able to justify the valuation premium, tax officers will automatically do the addition to the income and slap penalties in case of non-compliance,” said Amit Maheshwari, managing partner at Ashok Maheshwary & Co.
Besides exemption from angel tax, Finance Minister Nirmala Sitharaman had said in the Budget speech that start-ups will face reduced scrutiny from tax authorities.
“To resolve the so-called ‘angel tax’ issue, start-ups and their investors who file requisite declarations and provide information in their returns will not be subject to any kind of scrutiny in respect of valuations of share premiums," she said.
“If a start-up claims exemptions from angel tax but subsequently buys a motor vehicle, in contravention to the condition of notification issued by the DPIIT, it is liable to pay angel tax and 200 per cent penalty on the tax sought to be evaded,” said Naveen Wadhwa, DGM, Taxmann.
Sachin Taparia, founder and chairman of LocalCircles, said the move will result in only genuine start-ups submitting declaration. There are close to 3,000 start-ups of this type. “The declaration for exemption from Section 56(2)viib is designed to differentiate between genuine start-ups and shell firms. In case a company gives false declaration, the 200 per cent penalty as defined in the Finance Bill is appropriate,” said Taparia.
Further, angel tax exemptions were extended to investments from only VC funds in case of category-I alternative funds. This has been extended to other funds in this category including infrastructure funds, MSME funds and social venture funds. This category of funds receives incentives from the government, Sebi, and other regulatory bodies.
The Finance Bill in its original form had proposed tax deducted at source at 2 per cent on withdrawal of cash over ~2 crore from one bank account. The amendment now says the tax will be imposed on all accounts from one bank.
There are also changes in the deemed income provision. Earlier, money or property in India transferred by a resident to non-resident without consideration or inadequate consideration was proposed to be brought under I-T net. However, only money so transferred will attract income tax, at present.
The original Bill proposed a 2% TDS on cash withdrawal over Rs 2 cr from one bank account
The amendment now says thetax will be imposed onall accounts from one bank
There are changes in the deemed income provision also