Startups' Angel Tax Relief: DPIIT Recognition and CBDT Circular

Startups registered with the DPIIT have been exempted from assessment proceedings under the Angel Tax amendments introduced in the 2023 Budget. 

Startups in India have long faced the daunting challenge of the Angel Tax—a tax levied on capital received from the sale of shares above the fair market value. The Indian government introduced various amendments to the Angel Tax in the Budget of 2023. The most significant change was the expansion of the tax's scope to include foreign investments, a move that caused concern among many startups. However, amidst these changes, there is a ray of hope for startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT).

What is Angel Tax?

Angel Tax, also known as the Section 56(2)(viib) of the Income Tax Act, has been a longstanding issue for startups. It was originally introduced to curb money laundering by taxing investments in unlisted companies at an excessively high rate. However, this well-intentioned regulation created unintended challenges for startups.

The Angel Tax created perplexity and burstiness among startups and investors. It often led to tax demands on the premium paid by investors, even when the investments were genuine and made at a fair market value. This deterred investments in startups and was seen as a significant hurdle to entrepreneurship.

How did the Budget 2023 change the rules regarding Angel Tax?

The Budget of 2023 expanded the scope of Angel Tax to include foreign investments in startups, subjecting the excess premium to a tax rate exceeding 30%.

In the Budget for the fiscal year 2023-24, which spans from April 2023 to March 2024, significant changes were introduced to the Angel Tax. Notably, foreign investments in startups were brought under its ambit. This meant that the excess premium on these investments would be considered as 'income from sources' and taxed at a rate exceeding 30%.

The Department for Promotion of Industry and Internal Trade (DPIIT) plays a crucial role in supporting startups in India. It recognizes and provides benefits to eligible startups, including exemptions from various taxes and regulations.

Why DPIIT-Recognized Startups Were Exempted?

The Budget 2023 made a specific provision to exempt startups recognized by DPIIT from the expanded scope of Angel Tax. This decision may be  a move to encourage more startups to register with DPIIT, as it provides significant relief from the complex tax environment.

Role of CBDT in Providing Clarity

To provide greater clarity to field officers and startups, the Central Board of Direct Taxes (CBDT) issued a circular. This circular ensures that if a DPIIT-recognized startup is selected for scrutiny concerning Angel Tax, no verification will be conducted by the assessing officer. The contention of these startups will be summarily accepted.

The recent amendments in the Budget 2023 have brought significant changes to the scope of Angel Tax, impacting startups across India. However, DPIIT-recognized startups have found respite in the form of a CBDT circular, which exempts them from scrutiny related to Angel Tax. This administrative guidance ensures that recognized startups can operate with greater ease and encourages more businesses to seek DPIIT recognition. With this support, the Indian startup ecosystem can thrive and innovate, driving economic growth and job creation.