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Govt tells startups it will take devil out of angel tax – Livemint

No coercive action till expert panel resolves issue of taxing startups: CBDT

The government on Thursday gave relief to startups that have come under the scrutiny of tax officials for having raised capital above the fair value of their shares, a common practice among new-age enterprises.

The Central Board of Direct Taxes (CBDT) said in a statement that no coercive action related to tax demands would be made till the time an expert panel resolved the issue of taxing startups. “CBDT recognizes that startups are going to bring a lot of innovation to the country and, therefore, have to be supported in every possible manner,” the statement from the apex direct tax policymaking body said.

The announcement seeks to ease concerns raised by startups about tax officials questioning the share premium received at the time of raising capital through the issue of fresh shares. Startups’ problems stem from an anti-abuse provision introduced in the Income Tax Act in 2012 to curb the practice of politicians accepting bribes in the guise of share premium in unlisted companies set up by them. Section 56(2)(viib) of the Income Tax Act provides for taxation of the share premium that is above the fair valuation of shares as “other income”. Since startups are valued based on the business potential of their ideas, which could change with time, they are finding it hard to justify the share premium received. While tax officials prefer to value these enterprises based on their net asset value, companies tend to be valued based on estimates of their future earnings.

CBDT clarified that it is committed to promoting startups in the country. The Narendra Modi government has been promoting innovation and entrepreneurship under the Startup India mission as these new-age companies have the potential to create jobs.