Union finance minister Nirmala Sitharaman on Friday said that Section 56 (2) viib of the Income Tax Act, which had come to be known as the angel tax, will not apply to startups registered with Department for Promotion of Industry and Internal Trade (DPIIT).

Section 56 2 vii(b) counted any investment above the fair market value of shares as income from other sources and was taxes accordingly.

"We have issued several circulars and will issue further if necessary. The anti-abuse provision will not apply to startups registered with DPIIT," Ajay Bhushan Pandey, revenue secretary said.

The finance minister also announced a dedicated cell under the Central Board of Direct Taxes (CBDT) to address startup issues.

During the budget in July, the finance minister had said that in order to resolve the issue of angel tax, entrepreneurs and investors who file requisite declarations and provide information on returns will not be subject to scrutiny on the valuation of share premium under the act.

Startup industry members welcomed the finance minister's announcement on Friday but said it was just a reiteration of the announcement for startups made in the Budget and did not entail anything new in terms of angel tax.

"The finance minister reiterated the stance that angel tax would not be applicable to registered startups," said Siddarth Pai, founding partner of 3one4 Capital, "However, it is still unclear if it is a blanket exemption or if it is based on meeting the exemption criteria."

Nakul Saxena, director for public policy at Ispirt, said the announcement made in the budget for startups has now been affected, "This is a very strong statement from the finance minister. It is similar to what was said in the Budget but is packaged differently."

"The local tax offices need to also be sensitised on this as well as for proper implementation. The dedicated cell under CBDT should be set up in the next 30 days to resolve any further issues of implementation," he added.

Follow our complete coverage of measures announced by finance minister Nirmala Sitharaman here.

First Published:Aug 23, 2019 7:31 PM IST