The government proposes adjustments to the income tax rules for startups: A key official discusses how it will help the sector grow

According to tax experts, the Budget proposes modifying Section 56 of the Income Tax Act to combat tax evasion.

A top government official said on Friday that proposed revisions to the income tax rules for startups will provide parity between domestic and foreign investors.

According to Revenue Secretary Sanjay Malhotra, domestic investors are already taxed under Section 56 of the law.

In terms of the angel tax, “What we did here was trying to achieve parity with the residents. Residents are already taxed, thus there was no reason why non-residents could not be taxed as well.

“Probably due to this (this provision was introduced in Budget 2023). But, certainly, we are aware that we must design our procedures with the vast majority of people in mind so that they are not inconvenienced while we develop our standards, how we go about it, and do not leave it entirely to the discretion of our assessing officers, he stated.

CBDT Chairman Nitin Gupta stated that whenever the matter reaches their door, the Department will investigate the issues and take appropriate action.

Anurag Jain, Secretary of the Department for Promotion of Industry and Internal Trade (DPIIT) has stated that the proposed changes in income tax laws regarding the issuance of shares to foreign entities or overseas angel investors will not affect government-recognized startups.

Companies or startups that are not recognized by DPIIT, on the other hand, would be covered by the proposed revisions to Section 56 (2) of the Income Tax Act, according to Jain.

Section 56(2) (viib) states that any sum raised by a startup sector in excess of its fair market value is considered income from other sources and is taxed at 30%.

This provision was introduced in 2012 as an anti-abuse measure. It is known as the angel tax because of the impact it has on investments made by angel investors in new enterprises.

According to Jain, startups that are not registered with the department would be subject to the section’s updated restrictions.

According to tax experts, the Budget proposes modifying Section 56 of the Income Tax Act to combat tax evasion.