Interns work at startup company Hacklab in Bangalore. Photo: AFP

Offering a measure of relief to Indian startups, the government has increased clarity regarding the contentious angel tax, which had upset the country’s startup community.

The angel tax is imposed when any startup raises equity funding in excess of its “fair valuation.” The premium is treated as income, attracting a tax of more than 30%. The new tax was introduced in 2012 to curb money-laundering. It is known as the angel tax as it largely affects angel investments in startups.

The controversy arose in January when many startups were slapped with tax notices and their bank accounts were frozen. In one case the tax authorities even withdrew funds from the bank accounts of a food delivery startup, TravelKhana. There was a widespread outcry among the startup community, which also highlighted its grievances on social media.

Also Read: Angel tax a burden on Indian startups

In its new circular the Central Board of Direct Taxes said that no verification will be done by an assessing officer if a startup has been recognized by the Department for Promotion of Industry and Internal Trade. The board elaborated that it will “summarily accept” the contention of startups recognized by the trade promotion department if the notices issued by the income-tax department pertain only to the angel tax, Press Trust of India reports.

Similarly, it said the applicability of angel tax would not be pursued during the assessment proceedings and “inquiry or verification with regard to other issues in such cases shall be carried out by the assessing officer only after obtaining approval of his/her supervisory officer.”

If a startup is not recognized by the trade promotion department, then also the inquiry would be carried out after the approval of a supervisory officer.

The circular followed the announcement made by Finance Minister Nirmala Sitharaman while presenting the union budget last month. She proposed a host of incentives, including a special arrangement for resolution of pending assessments of income tax cases, with a view to encouraging startups.

However, while these measures provide protection from future income tax notices, there is no clarity on the fate of startups that had already come under the tax department’s radar.

In June, the government had said that 672 start-ups had been issued letters of exemption from angel tax. To be eligible for relief, start-ups have to register with Department for Promotion of Industry and Internal Trade and submit an undertaking, saying they are not investing in specified segments that are usually suspected to be used for money laundering unless these investments are made “in the ordinary course of business”.

For instance, these start-ups can’t invest in realty; loans and advances; shares and securities; a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds one million rupees, and jewelry, etc. However, if a start-up’s business model involves investment in jewelry, then it can invest.

As many as 16,116 start-ups are already registered with the Department of Promotion of Industry and Internal Trade, and many more are expected to follow suit. Earlier this year, the government had relaxed norms for start-ups to be exempted from angel tax by raising the funding cap by unlisted firms or individuals in a start-up to 250 million rupees from 10 million rupees.

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