In recent times, India is emerging as the one of the fastest growing economies in the world. This is in turn due to the free trade policies, Tax benefits for foreign investors and the recent start-up revolution to name a few. Businesses with revolutionary ideas that can change the world as we know it, are valued not only by the customers in the industry but also the various investors who see potential in the business’s growth in the its initial years. Such development in business, however, also provide opportunities for people to launder money, which revenue tax law has combated by the insertion of Section 56(2)(vii b) of Income Tax Act, 1961.(“The Act”).

What does Section 56 (2) (vii b) deal with?

As a consequence of section 56 (2) (vii b) of the act, the amount that is considered above “fair value” valuations of the start-up, would be taxed as ‘income from other sources’ of the Act.

The problem arises because start-ups are often valued subjectively based on discounted cash flows, without considering intangibles like goodwill. This can cause differing interpretations of “fair value” and leave start-ups vulnerable to unduly high taxes because the Income tax Department feels the investment is too high over their valuation.

What kind of Start-ups would not have to pay Angel Taxes?

The government recently through G.S.R. 34(E) Dt: 16th January 2019 , provided Angel tax Relief for start-up that are recognized by the Department of Industrial Policy and Promotion (DIPP) and fulfil the following conditions:

Once the Start-up obtains the approval from Central Board of Direct Tax (CBDT), the start-up would not be required to bear tax under section 56 (2) (vii b) of the Act.

However, in case the approval is requested for shares already issued by the Start-up, no application shall be made if assessment order has been passed by assessing officer for the relevant financial year.

Conclusion

The Income tax Department has taken measures to ensure that money laundering is curbed which are being routed through investments in start-ups. It was foreseen that through investments in start-ups, people mobilised their un-accounted income through investment in shares of the start-ups.

Through the procedure now notified, the income tax department has looked for ways to ensure that genuine assessees are not adversely affected.

Disclaimer:"The information contained herein is only for informational purpose and should not be considered for any particular instance or individual or entity. We have obtained information from publicly available sources, there can be no guarantee that such information is accurate as of the date it is received or it will continue to be accurate in future. No one should act on such information without obtaining professional advice after thorough examination of particular situation."