Recognised startups not to face impact of proposed changes in income tax laws: DPIIT secretary

Government-recognised startups would not be impacted by the proposed changes in the income tax laws with regard to issuance of shares to foreign entities or overseas angel investors, a top government official said on Thursday. However, secretary in the Department for Promotion of Industry and Internal Trade (DPIIT) Anurag Jain said that companies or startups which are not recognised by DPIIT would be covered under the proposed amendments to Section 56 (2) of the Income Tax Act.

Section 56(2) (viib) provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent.

Touted as an anti-abuse measure, this section was introduced in 2012. It is dubbed as angel tax due to its impact on investments made by angel investors in startup ventures. "There is no angel tax on startups, lets be clear about that. Sec 56 (ii) used to have two proviso - one was preferential treatment of foreign players. So that preferential treatment has been done away with...Anybody which is a recognised startup by the DPIIT will not attract angel tax if investment is made into that, be it foreign or domestic," Jain told reporters here.

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He was replying to a question about his views on the proposed changes in the section 56. "Any startup which gets recognition by the DPIIT, there is no change for that," he added.

Jain said the startups that are not registered with the department will attract the modified provisions of the section. According to tax experts, the Budget has proposed to tweak Section 56 of the income tax act to check tax avoidance.

Commenting on the proposal, Rohinton Sidhwa, Partner, Deloitte India, said that this section was actually meant to plug a specific practice of avoiding tax by parking cash in a company at a high premium ostensibly to benefit the existing shareholder of the company.

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