Angel Tax was a bug which had bitten many startups in the past two to three years in the form of huge tax demands. This impacted the growth of startups and many were forced to shutdown their operations. Representations were made to the Government to relook at this provision and to bring out clarity in application of the provisions.

The Honourable Finance Minister, Smt. Nirmala Sitharaman, in her maiden Budget Speech assured that the Startups will be provided relief from Angel Tax. Accordingly, the Central Board of Direct Taxes has issued a circular clarifying that the Angel Tax provisions i.e. Section 56 (2) (viib) of the Income Tax Act will not be applicable to Startups. As per the Circular, the Assessing Officer shall not verify the applicability of Section 56(2)(viib), if such Startup has been recognised by DPIIT under the new and much more relaxed norms of Startup recognised notified by DPIIT on 19th Feb 2019. This is applicable even if the Startup had obtained the recognition post the issue of scrutiny notice by the tax department.

Angel Tax is a tax levied on the excess premium received by a Startup on the issue of shares to its Angel Investors. The Income tax law provided certain methods of valuation of Startups. However, the tax department invariably did not agree with the valuation method followed by Startups and held in every case that the premium received is in excess of its valuation and taxed such premium as income in the hands of the Startup.

The Circular is a welcome step from the Government. This provides assurance and confidence to businesses and the fear of ‘tax terrorism’ would be reduced. Progressive Steps like these are required to encourage entrepreneurship and to bring ‘Ease of Doing Business’ in India in reality.