CBDT letter restrains officials from taking coercive action

The Central Board of Direct Taxes (CBDT) has directed assessing officers (AOs) not to use coercive measures to recover tax from startups if a demand has been made under the so-called angel tax. The letter issued on Monday says, “The matter is under consideration of the board. In view of the above, no coercive measures to recover outstanding demand should be used in the matter till further instructions.” This follows a high-profile meeting last Friday between the Departments of Revenue and Industrial Policy and Promotion (DIPP) and CBDT, following concerns over the large number of tax demands made from startups. CBDT had, after the meeting, said there will be no coercive measures to recover tax, and also announced setting up of a new review committee by DIPP.

The letter is a formal communication to assessing officers that cites a February 6 letter that had asked them not to take coercive measures in case of startups if additions have been made under Section 56(2)(VII B) of the Income Tax Act. The provision was introduced in 2012 to prevent money laundering through equity issuance and because it impacted angel investors in startups, it came to be called angel tax. Under the section, the amount realised in excess of the fair value of shares from investors is considered as income and taxed as such that year. It does not apply to startups recognised by DIPP.

The proposed committee comprising experts from IIMs/IITs would consider recognition of startups, including that of premium and other related issues.