Consolidated CBDT circular for assessment of start-ups
September 1, 2019
The Central Board of Direct Taxation (CBDT) has issued a consolidated circular dated 30 August 2019 with respect to tax assessment of start-ups. This circular consolidates all earlier circulars issued by CBDT on the applicability of section 56(2)(viib) of the Income Tax Act 1961 to angel investors and makes a few additional clarifications. These clarifications have been issued in view of the Department for Promotion of Industry and Internal Trade (DPIIT) notification dated 19 February pertaining to exemption of recognised startups from angel tax liability.
The final position and procedure with respect to applicability of section 56(2)(viib) is as below:
Startups recognised by the DPIIT which have filed declaration in Form-2 and whose cases are under “limited scrutiny” on the single issue of applicability of section 56(2)(viib), their contention will be summarily accepted. All such assessments should preferably be completed by the AOs by 30 September 2019
Startups recognised by the DPIIT which have filed Form-2 and whose cases are under scrutiny for multiple issues, including applicability of 56(2)(vii)(b), inquiry in such cases will not be carried out under section 56(2)(viib) by the AO but will be carried out with respect to all other issues after obtaining approval of the supervising authority. All such assessments should be taken on priority and preferably be completed by the AOs by 31 October 2019.
Startup companies who have not filed Form 2 but have been selected for scrutiny, inquiry will be carried out only after obtaining approval of the supervising Authority. All such assessments should be taken on priority and preferably be completed by the AOs by 31 October 2019
Section 56(2)(viib) will not apply in respect of assessments made before 19 February 2019 if the startup has filed Form 2. Where an addition is made under section 56(2)(viib) in an assessment order passed before 19 February 2019, if an appeal against such assessment is pending before the CIT(A), the appellate order should be passed on or before 31 December 2019. If the case is pending before the ITAT, the Department will not press the ground relating to the addition made under section 56(2)(viib). All other income-tax demands may be pursued only after confirmation by the ITAT.
A start-up cell, comprising of five ex-officio members, dedicated to redressing grievances and mitigating tax-related issues has been constituted on 30 August 2019.
SAM & Co comment
As of September 2019, there are 22,350 start-ups recognized by DPIIT. In line with the government’s target of recognizing 50,000 start-ups by 2024, the Finance Act 2019 has further liberalized the tax benefits extended to start-ups. Not only this, a conducive environment is being created by the CBDT by establishing start-up cells to address genuine grievances of the start-up community and issuing circulars on procedure for pending assessments of start-ups. However, it is interesting to note that while DPIIT’s turnover threshold for recognition of a start-up is INR 100 crores, most benefits under the Income-tax laws are available (save for the exception of angel tax exemption) only if the turnover does not exceed INR 25 crores. An alignment in the DPIIT and tax incentive policy will further provide a fillip to start-ups.
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