Govt proposes changes in income tax law for startups: Here's how it will help sector to boom, top official explains

The proposed changes in the income tax law with regard to startups would bring in parity between domestic and foreign investors, a top government official said on Friday.

Revenue secretary Sanjay Malhotra said that the domestic investors are already being taxed under the section 56 of the law.

With regard to angel tax, "what we did here was we have tried to bring in parity with the residents. The residents are already being taxed and there was no reason why the non-residents should not be paying similar tax.

"Probably because of this reason (this provision was introduced in Budget). But yes we are aware that we have to build our systems keeping in mind that a huge majority of people are honest and so they are not put to inconvenience while we build our rules, how we go about it, and don't leave it totally to the discretion of our assessing officers, he said.

CBDT Chairman Nitin Gupta said that once the issue would reach their door, the Department will examine the concerns and take it forward.

Department for Promotion of Industry and Internal Trade (DPIIT) Secretary Anurag Jain has said that 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.

However, 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, Jain has said.

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.

Jain has 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.

With PTI Inputs