Startup tax: Jaitley's angels to the rescue!

Startups facing 'Angel Tax' troubles under Section 56(2) of the Income Tax Act can now breathe easy. The Ministry of Finance has sent out a circular asking tax officials to refrain from coercive action.

Startups have finally got some relief from the so-called 'Angel Tax'. The Ministry of Finance's Department of Revenue has sent a circular to all Principal Chief Commissioners of Income Tax clearly stating that "no coercive measure to recover the outstanding demand would be taken" against startups that "fall within the definition given in Notification of DIPP" in cases that fall under Section 56(2) of the Income Tax Act, 1961.

There is some relief for those startups that have already received orders to pay tax on funding raised, and have filed appeals. The circular states:

...in all such cases which are pending with the Commissioner (Appeals), necessary administrative steps should be taken for expeditious disposal of appeals, preferably by 31st March, 2018.

The circular, a copy of which has been seen by YourStory, is dated February 6.

Startup founders said this is a positive development. While startups that have already got notices will have to go through the appeal process, founders say the Government's messaging is clear.

The Government's messaging is now clear. They are saying go easy on the startups. We are hoping the appeals will go in our favour," said a founder, who has received a notice, and has filed an appeal.

As per the rules, a startup needs to pay up 20 percent of the tax amount to file the appeal. Startups have filed the appeal online without paying up this 20 percent. "We thought of worrying about this 20 percent when the tax officials ask for it, as many of us do not have this money. Now that the Government has said they need to close this by March 31st, we intend to tell tax officials to finish off the appeals process without us paying the amount. We are already seeing a change in attitude," said the founder.

However, this circular addresses only those issues created by Section 56(2), which pertains to company valuation.

The issues raised by Section 68 of the act, are yet to be addressed. A few startups have been asked to show evidence of investor creditworthiness by giving audited statements, bank statements, and ITR details. Startups say they can comply with legal PAN tagged transactions. However, there is the risk that in case of failure to produce the documents asked for by Assessment Officers, the Income Tax Department can convert the entire funding as taxable income.

Startup founders facing this problem are hoping for a quick resolution of this issue too.