Proposed modifications to the income tax legislation won’t have an impact on recognised startups: DPIIT secretary

According to a top government official, government-recognized companies would not be harmed by the planned revisions to the income tax legislation regarding the issuing of shares to foreign organizations or overseas angel investors.

Anurag Jain, secretary of the Department for the Promotion of Industry and Internal Trade (DPIIT), stated that the proposed changes to Section 56 (2) of the Income Tax Act would apply to businesses or startups that are not recognized by DPIIT.

The amount raised by a startup in excess of its fair market value is described in Section 56(2)(viib) as “revenue from other sources” and is subject to a 30 percent tax.

This clause was added in 2012 and was promoted as an anti-abuse measure. Due to its effect on contributions made by angel investors in new enterprises, it is known as the “angel tax.”

“There is no angel tax on startups, let’s be clear about that. Sec 56 (ii) used to have two proviso – one was the 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 an investment is made into that, be it foreign or domestic,” Jain told reporters here.

Regarding his opinions on the suggested revisions to section 56, he was responding to a query.

“Any startup which gets recognition by the DPIIT, there is no change for that,” he added.

Startups that are not registered with the government would be subject to the section’s updated restrictions, according to Jain.

Tax experts claim that the Budget’s planned changes to Section 56 of the Income Tax Act will stop tax evasion.

According to Rohinton Sidhwa, Partner at Deloitte India, who commented on the proposal, this clause was actually intended to stop a particular method of evading taxes by storing funds in a firm at a high premium, allegedly to benefit the current shareholder of the company.