Category Income Tax

Step 1: Go to the website https://www.protean-tinpan.com/

Step 2: Click on “Challan Status Inquiry” under the ‘Services‘ tab.

Step 3: We can view the challans either by providing the CIN number or the TAN number.

Step 4: In case of Tan Based View, fill in the details by entering the TAN number of the assessee and select the period for which you want to view the challans. Period selected should be within 24 months.

Step 5: We can view the challan details for the mentioned period as below.

Under the given picture, the column for “Amount” has been given blank. we can enter the amount and ‘Confirm the Amount’. If the amount you have entered is correct, a text in bold would display as “Amount Matched” and vice versa.

In case you want download the challan file, click on “Download Challan File“.

A ‘csi’ file would be created, you can use that csi file for verifying the challan details while filing TDS returns.

DEFINITION OF BUSINESS

According to section 2(13) of the Income Tax Act, the term “business” is defined as any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.”

The term `Business’ means an activity being carried on continuously and systematically by a person with the application of his labor or skill with a view to earn income. The expression “business” does not necessarily mean trade or manufacture only, it has a much wider meaning. Business simply means any economic activity being carried on for earning profits. In any business, repetition of transactions or continuity of similar transactions is not a necessary element. Transactions may not be regular in nature.

The following activities have been considered as ‘Business’:

• Advertising agent
• Clearing, forwarding and shipping agents
• Couriers
• Insurance agent
• Nursing home
• Stock and share broking and dealing in shares and securities
• Travel agent

DEFINITION OF PROFESSION 

The term ‘Profession’ is defined under Section 2(36) of the Act Profession also includes vocation which is only a way of living. “Profession” involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the skill of the operator, as distinguished from an operation which is substantially the production or sale or arrangement for the production or sale of commodities.

 Classification of any activity as ‘business’ or ‘profession’ will depend on the facts and circumstances of each case.

As per Section 44AA of the IT Act, the following have been considered as ‘Profession‘:

• legal,
• medical,
• engineering,
• architectural profession,
• the profession of accountancy,
• technical consultancy or
• interior decoration.

Further under Rule 6F and other professions notified thereunder, the following activities can also be considered as a ‘Profession‘:

(i) Authorized Representative,

(ii) Company Secretary,

(iii) Film Artists/Actors, Cameraman, Director including an assistant director; a music director, including an assistant music director, an art director, including an assistant art director; a dance director, including an assistant dance director; Singer, Story-writer, a screen-play writer, a dialogue writer; editor, lyricist and dress designer,

(iv) Information Technology.

DIFFERENCE BETWEEN BUSINESS AND PROFESSION

FAQs

1. Are Nursing Homes and Hospitals a Business or a Profession?

• If Nursing Home or Hospital is owned by an Individual then it will be treated as ‘Profession’. But if it is owned by a Company or a firm then it will be treated as ‘Business’ because an artificial body like a company or a firm cannot possess any personal skills required to practice in a profession.

2. Teaching institutes are Business or Profession?

• Same logic will be applicable in case of teaching institutes. Teaching is a profession as specified skills are required to teach any student/class. But in case of a teaching institution, it is an artificial body, and hence, it will be considered as a business. But a teaching institution can be considered as a Profession if it is owned by an individual.

SECTION 115BBH – TAX ON INCOME FROM VIRTUAL DIGITAL ASSETS

As per Section 115BBH, virtual digital assets (cryptocurrencies and non-fungible tokens) would be taxed at a flat rate of 30% on profits. This section will be effective from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 (Financial Year 2022-23) and subsequent assessment years.

• Tax shall be levied in the same manner as winnings from horse races or other speculative transactions are treated.
• No deduction will be allowed in respect of such income from virtual digital assets except for the deduction as “Cost of Acquisition”.
• Cost of Acquisition does not include infrastructure cost which might be incurred on mining crypto assets.
• Losses incurred from one virtual digital currency cannot be set-off against any income, not even from the income from another digital currency. However, Rebate under section 87A is available.
• If any person receives Digital Currency as a gift, it would be taxable in the hands of recipient.

SECTION 194S – TDS ON VIRTUAL DIGITAL ASSETS

The Finance Bill, 2022 has inserted a new section 194S which requires to deduct tax at source (TDS) @ 1% on the purchase consideration on transfer on virtual digital asset to any resident. Section 194S is effective from 1st July, 2022.

TDS @ 1% shall be paid irrespective of profit or loss on Virtual Digital Asset (mainly cryptocurrencies). Virtual Digital Asset is defined under Section 2(47A). In case of transfer of virtual digital assets, tax shall be deducted from the gross amount of consideration paid to the resident person.

However, in some cases, before releasing the consideration, the person responsible for the transfer of virtual digital asset shall ensure that tax has been paid in respect of such consideration:

• Where consideration is wholly in kind;
• Where a transaction is in exchange for another virtual digital asset, and there is no part in cash; or
• Where consideration is partly in cash and partly in kind, but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such transfer.

According to Section 194S of the Income tax Act, Specified Person is defined as:

• a person being an individual or Hindu Undivided Family (HUF) whose total sales, gross receipts or turnover in case of business does not exceed Rs 1 crore and in case of profession does not exceed Rs 50 lakh during the financial year immediately preceding the financial year, or
• a person being an individual or Hindu Undivided Family (HUF) not having any income under the head “Profits and gains of business and profession”.

In case of Specified Person, the provisions of section 203A (Requirement to obtain Tax deduction and Collection Account Number) and 206AB (Special provision for deduction of TDS for Non-Filers of Income Tax Returns) will not be applicable.

Further, in case the payer is a Specified Person and the aggregate value of such consideration to a resident is less than Rs.50,000 during the financial year, no tax shall be deducted. However, in any other case, the threshold limit is proposed to be Rs.10,000 during the financial year.

TDS collected under Section 194S shall be deposited within 30 days from the end of the month in which the deduction has been made. Deposit of tax so deducted shall be made in the challan-cum-statement Form 26QE.

If the PAN of the deductee (buyer) is not available, then the tax at the time of transfer of VDA will be deducted at the rate of 20%. Further, if an individual has not filed his/her income tax return, then TDS will be deducted at a higher rate of 5% (as against normal rate of 1%), if the payer is not a specified person.

CIRCULAR NO. 13 of 2022 – Guidelines for removal of difficulties under sub-section (6) of section 194S of the Income-tax Act, 1961 issued by CBDT on 22nd June, 2022

Question 1. Who is required to deduct tax when the transfer of VDA is taking place on
or through an Exchange and payment is made by the purchaser to the Exchange
(directly or through broker) and then from the Exchange it goes to seller directly or
through the broker?
Answer: According to section 194S of the Act, any person who is responsible for paying to
any resident any sum by way of consideration for transfer of VDA is required to deduct tax.
Thus, in a peer to peer (i.e. direct buyer to seller) transaction, the buyer (i.e. person paying the consideration) is required to deduct tax under section 194S of the Act.
However, if the transaction is taking place on or through an Exchange there is a possibility of
tax deduction requirement under section 194S of the Act at multiple stages. Hence, in order
to remove difficulties for transactions taking place on or through an Exchange, the following
clarifications are issued:-
(i) In a case where the transfer of VDA takes place on or through an Exchange and the
VDA being transferred is owned by a person other than the Exchange: In this case buyer
would be crediting or making payment to the Exchange (directly or through a broker). The
Exchange then would be required to credit or make payment to the owner of VDA being
transferred, either directly or through a broker. Since there are multiple players, to remove
difficulty it is clarified that:

1. Tax may be deducted under section 194S of the Act only by the Exchange which is
   crediting or making payment to the seller (owner of the VDA being transferred). In a
   case where broker owns the VDA, it is the broker who is the seller. Hence, the amount
   of consideration being credited or paid to the broker by the Exchange is also subject to
   tax deduction under section 194S of the Act.
2. In a case where the credit/payment between Exchange and the seller is through a
   broker (and the broker is not seller), the responsibility to deduct tax under section
   194S of the Act shall be on both the Exchange and the broker. However, if there is a
   written agreement between the Exchange and the broker that broker shall be deducting tax on such credit/payment, then broker alone may deduct the tax under section 194S of the Act. The Exchange would be required to furnish a quarterly statement (in Form no 26QF) for all such transactions of the quarter on or before the due date prescribed in the Income-tax Rules, 1962.

(ii) In a case where the transfer of VDA takes place on or through an Exchange and the
VDA being transferred is owned by such Exchange: In this case there are no multiple
players. The buyer is required to deduct tax under section 194S of the Act. However, there may be a practical issue as the buyer may not know whether the VDA being transferred is
owned by the Exchange or not. Hence, there may be genuine doubt in the mind of buyer with regard to its responsibility to deduct tax under section 194S of the Act. This difficulty would also be there if the buyer is buying VDA from an Exchange through a broker. To remove this difficulty, it is clarified that while the primary responsibility to deduct tax under section 194S of the Act, in this case, remains with the buyer or his broker, as an alternative the Exchange may enter into a written agreement with the buyer or his broker that in regard to all such transactions the Exchange would be paying the tax on or before the due
date for that quarter. The Exchange would be required to furnish a quarterly statement (in Form No. 26QF) for all such transactions of the quarter on or before the due date prescribed in the Income-tax Rules, 1962. The Exchange would also be required to furnish its income tax return and all these transactions must be included in such return. If these conditions are complied with, the buyer or his broker would not be held as assessee in default under section 201 of the Act for these transactions.
For the purpose of this circular,-
(i) The term “Exchange” means any person that operates an application or platform for
transferring of VDAs, which matches buy and sell trades and executes the same on its
application or platform.
(ii) The term “Broker” means any person that operates an application or platform for
transferring of VDAs and holds brokerage account/accounts with an Exchange for
execution of such trades.

Question 2: Question no 1 was with respect to transactions where the consideration for
transfer of VDA is not in kind. How will this operate in a situation where it is in kind or
in exchange of another VDA?

Answer: According to proviso to sub-section (1) of section 194S of the Act, there could be
situations where the consideration is in kind or in exchange of another VDA or partly in kind
and cash is not sufficient to meet the TDS liability. In these situations, the person responsible for paying such consideration is required to ensure that tax required to be deducted has been paid in respect of such consideration, before releasing the consideration.

In the above situation, the buyer will release the consideration in kind after seller provides
proof of payment of such tax (e.g. Challan details etc.). In a situation where VDA “A” is being exchanged with another VDA “B”, both the persons are buyer as well as seller. One is buyer for “A” and seller for “B” and another is buyer for “B” and seller for “A”. Thus both need to pay tax with respect to transfer of VDA and show the evidence to other so that VDAs can then be exchanged. This would then be required to be reported in TDS statement along with challan number. This year Form No. 26Q has included provisions for reporting such transactions. For specified persons, Form No. 26QE has been introduced.
However, if the transaction is through an Exchange there is practical issue in implementing
this provision. In order to address this practical issue and to remove difficulty, it is clarified
that in such a situation, as an alternative, tax may be deducted by the Exchange. Such an alternative mechanism can be exercised by the Exchange based on written contractual agreement with the buyers/sellers.
If such an alternative mechanism is exercised,
(i) the Exchange would be required to deduct tax for both legs of the transactions and pay
to the Government. In the Form 26Q it will, for the reasons explained before, need to
report it as tax deducted on both legs of the transaction.
(ii) the buyer and seller would not be independently required to follow the procedure
prescribed in proviso to sub-section (1) of section 194S of the Act.

When the Exchange opts for deduction of tax under section 194S of the Act on such
transactions, there is also a possibility that the tax amount deducted is also in kind and needs to be converted into cash before it can be deposited with the Government. In this regard, the following mechanism shall be adopted by the Exchange
(i) At the time of transaction, the Exchange will deduct TDS in the pair being traded. For
example, in case of trade for Monero to Deso, 1% of Monero and 1% Deso will be
deducted as tax under section 194S of the Act by the Exchange and balance shall be
transferred to the customer. The trail of transactions evidencing deduction of 1% of
consideration for every VDA to VDA trade shall be maintained by the Exchange.
(ii) The Exchanges shall immediately execute a market order for converting this tax
deducted in kind (1% Monero/ 1% Deso in the above example) to one of the primary VDAs (BT, ETH, USDT, USDC) which can be easily converted into INR. This step will
ensure that the tax deducted under section 194S of the Act in the form of non-primary
VDAs like Deso/Monero is converted to an equivalent of primary VDAs which have a
ready INR market. Time stamps of timing of orders to be maintained to ensure such
conversion of VDAs withheld to be done on immediate basis by the Exchange. If the
taxes are withheld in primary VDAs, this step would be ignored.
(iii) All the tax deducted under section 194S of the Act in the form of primary VDAs {or
converted into primary VDA under step (ii)} will be accumulated for the day. Time limit
will be from 00:00 hours to 23:59 hours. VDA accumulation by the Exchange shall be
verifiable from the trail of orders for VDA to VDA trades executed during the day.
(iv) The accumulated balance of primary VDAs at 00.00 hours will be converted into INR
based on the market rate existing at that time. In order to bring in consistency and to
avoid discretion, the Exchanges are required to place market order at 00:00 hours for the
tax withheld {or converted under step (ii)} in form of primary VDAs for conversion into
INR. These sell market orders shall be executed based on the open buy orders in the
market. Price and quantity data for every matched trade shall be maintained by the
Exchange and shall be available for verification. It shall be verifiable from the system
coding that the conversion into INR happened at the first available buy order based on the
prevailing buy order book of the respective Exchange at the time of conversion. As a
practice, the respective Exchange liquidating the VDA shall be prohibited to be a buyer
for these VDAs.

(v) Customer will be issued a contract note over email which will include the amount of
tax withheld in kind under section 194S and the amount of INR realized from such tax
withheld.
(vi) The tax withheld in kind under section 194S of the Act and converted into INR by
following the above procedure shall be deposited in the Government Account as per the
time line and process given in the Income-tax Rules 1962.
It is clarified that there would not be any further TDS for converting the tax withheld in kind
in the form of VDA into INR or from one VDA to another VDA and then into INR.

Question 3: Whether the provision of section 194Q of the Act is also applicable on
transfer of VDA?
Answer Without going into the merit whether VDA is goods or not, it is clarified that once
tax is deducted under section 194S of the Act, tax would not be required to be deducted under section 194Q of the Act.

Question 4: Whether the consideration for transfer of VDA shall be on Gross basis after
including GST/commission or it shall be on “net basis” after exclusion of these items.

Answer: In order to remove difficulty, it is clarified that the tax required to be withheld under
section 194S of the Act shall be on the “net” consideration after excluding GST/charges
levied by the deductor for rendering service.

Question 5: In transactions where payment is being carried out through payment
gateways, there may be tax deduction twice.

To illustrate that a person ‘X’ is required to make payment to the seller for transfer of VDA. He makes payment of one lakh rupees through digital platform of “ABC”. On these facts liability to deduct tax under section 194S of the Act may fall on both “X” and “ABC. Is tax required to be deducted by both?
Answer: In order to remove this difficulty, it is provided that in the above example, the
payment gateway will not be required to deduct tax under section 194S of the Act on a
transaction, if the tax has been deducted by the person (‘X’) required to make deduction
under section 194S of the Act. Hence, in the above example, if “X” has deducted tax
under section 194S of the Act on one lakh rupees, “ABC” will not be required to deduct tax
under section 194S of the Act on the same transaction. To facilitate proper implementation,
“ABC” may take an undertaking from “X” regarding deduction of tax.

Question 6: Section 194S shall come into effect from the 1st July 2022. The liability to
deduct tax under section 194S of the Act applies only when the value or aggregate value
of the consideration for transfer of VDA exceeds fifty thousand rupees during the
financial year in case of consideration being paid by specified person and ten thousand
rupees in other cases. It is not clear how this limit of fifty thousand (or ten thousand) is
to be computed?
Answer: It is clarified that,-

(i) Since the threshold of fifty thousand rupees (or ten thousand rupees) is with respect to
the financial year, calculation of consideration for transfer of VDA triggering deduction
under section 194S of the Act shall be counted from 1st April, 2022. Hence, if the value or
aggregate value of the consideration for transfer of VDA payable by a person exceeds
fifty thousand rupees (or ten thousand rupees) during the financial year 2022-23
(including the period up to 30th June 2022), the provision of section 194S of the Act shall
apply on any sum, representing consideration for transfer of VDA, credited or paid on or
after 1st July 2022.
(ii) Since the provision of section 194S of the Act applies at the time of credit or payment
(whichever is earlier) of any sum, representing consideration for transfer of VDA, such
sum which has been credited or paid before 1st July 2022 would not be subjected to tax
deduction under section 194S of the Act.

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While we have exercised reasonable efforts to ensure the veracity of information/content published, we shall be under no liability in any manner whatsoever for incorrect information, if any.

Section 194R of the Income Tax Act has been inserted in the Finance Act 2022 which is applicable from 1^st July 2022. Government has introduced section 194R keep a check on tax leakage. This section requires for deducting tax at source (TDS) in respect of business or profession on Benefits or Perquisites. Benefit/Perquisite can be either in kind or in combination of cash and kind.

Section 28(iv) of the Income Tax Act, 1961 provides that the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession is to be charged as Business Income in the hands of the recipient of such benefit or perquisite.

APPLICABILITY

Section 194R of the Income Tax Act is applicable to

• All assessee (other than Individuals and HUF)
• Individuals and HUF whose Turnover exceeds Rs.1 Crore or Professional Receipts exceeds Rs.50 Lakhs.
• Any person providing benefit or perquisite to a Resident.

NON-APPLICABILITY

• Provision of Section 194R is not applicable if the benefit or perquisite is provided to any Government entity.
• Section194R is not applicable on the benefits given on occasions like festivals, marriage, etc. It is applicable only on benefits and perquisites arising out of business or profession of any resident.
• As gift/ perks/ benefits, i.e., any benefit/perquisite provided to Resident employee will be added in salary and TDS will be deducted U/s 192 So provisions of Sec 194R is Not applicable in given case.

TAX RATE & THRESHOLD LIMIT

Any benefit or perquisite arising from business or profession whose aggregate value exceeds Rs.20,000 in the financial year will fall under Section194R and shall have to pay TDS @ 10%. TDS should be deducted before providing such benefit or perquisite.

To calculate the threshold limit, benefits or perquisites for the whole year shall be taken into consideration. In other words, we can say that benefits or perquisites shall be calculated from 1st April, 2022.

However, the benefit or perquisite which has been provided before 30st June, 2022 would not be subject to tax deduction under section 194R. Only the value of benefits or perquisites which are provided after 1st July, 2022 shall be liable for deducting tax at source at the rate of 10%.

CASE STUDIES

M/s PQR Limited/ PQR (Partnership Firm/AOP/BOI/Trust/Co-operative society), or Mr. PQR (Individual/HUF) having Turnover above Rs.1,00,00,000 or Professional Receipts above Rs. 50,00,000 in FY 2021-22 AY 2022-23 provides Gold Coins/ Holiday Package/ Coupons/Laptops/etc. to its dealers who is:

Case 1: Resident Person, provided with a holiday package amounting to Rs.40,000 +GST on 15/05/2022.

APPLICABILITY	REASON
Not Applicable	Since the benefit/gift/perquisite is provided before 1st July,2022, this section will not be applicable.

Case 2: Resident Person, provided with a holiday package amounting to Rs.40,000 +GST on 15/07/2022.

APPLICABILITY	REASON
Applicable	Since the benefit/gift/perquisite is provided after 1st July,2022, this section will be applicable and TDS will be payable @10%.

Case 3: Resident Person, provided with a holiday package amounting to Rs.10,000 +GST on 15/05/2022 and Gold Chain worth Rs.16000 on 31/07/2022.

APPLICABILITY	REASON
Applicable	Since the Gold chain is provided after 1st July,2022 and the aggregate value exceeds the threshold limit of Rs.20,000, i.e., 10,000 before 01/07/2022 and 16,000 after 01/07/2022, this section will be applicable but TDS will be payable only on the value of Gold chain which is Rs.16,000 @10%.

Case 4: Resident Person, provided with a holiday package amounting to Rs.10,000 +GST on 15/05/2022 and Gold Chain worth Rs.25000 on 31/07/2022 on the occasion of marriage

APPLICABILITY	REASON
Not Applicable	As the Gold chain provided after 1st July,2022 is on the occasion of marriage and not from business/profession, it would not be included in the aggregate value. And therefore, aggregate value does not exceed the threshold limit of Rs.20,000, so Section 194R will not be applicable.

Case 5: M/s ABC Limited (Resident Dealer) was provided with Gold Coin Worth Rs.15000 on 31/07/2022 on achieving target for FY 2021-22 and being impressed with Mr. B (employee of M/s ABC) performance it provided Silver Coins amounting to Rs.10,000 + GST to Mr. B on 31/07/2022 as gift.

APPLICABILITY

REASON

Not Applicable

As the Gold coin provided after 1st July,2022 does not exceed the aggregate value of Rs.20,000, section 194R will not be applicable on M/s ABC Ltd.   Silver coins worth Rs.10,000 is not in relation with business and is provided under his personal capacity. Hence it shall not be included in the calculation of aggregate value. Therefore, Section 194R is not applicable to either Mr. B or M/s ABA Ltd.

VALUATION

It has been clarified that the valuation of benefit/perquisite shall be made at the fair market value of that benefit or perquisite.

However, if the deductor has purchased that benefit from an outside party, the value of benefit/perk will be equal to the purchase price to the deductor. And in case the deductor manufactures the same, value of benefit/perk would be equal to the market price of such item.

FAQs

Q1. Whether sales discount will attract TDS under this section?

Since sales discount are ordinary selling expenditure and are incurred as incentives to distributors for meeting sales targets, so it does not constitute as benefit or perquisite. Therefore, Section 194R will not be applicable.

Q2. Does Section194R applies to Capital Assets?

Capital Assets like car, land, etc. are taxable as benefit or perquisite and thus capital assets are covered under the ambit of section 194R.

Q3. Does Section 194R attracts taxability for free samples of medicines given to doctors?

Section 194R will be applicable to doctors or hospitals if they are receiving free samples of medicines.     

Q4. Does the valuation of benefit or perquisite include GST?

The CBDT has clarified that GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R.

Q5. Under which head would it be taxable in the hands of the Receiver?

It would be taxable as business income under the head Business and Profession.

Q6. Many a times, a social media influencer is given a product of a manufacturing company
so that he can use that product and make audio/video to speak about that product in social media.
Is this product given to such influencer a benefit or perquisite?
In case of benefit or perquisite being a product like car, mobile, outfit, cosmetics etc and if the product is returned to the manufacturing company after using for the purpose of rendering service, then it will not be treated as a benefit/perquisite for the purposes of section 194R of the Act. However, if the product is retained then it will be in the nature of benefit/perquisite and tax is required to be deducted accordingly under section 194R of the Act.

Q7. Whether reimbursement of out of pocket expense incurred by service provider in the
course of rendering service is benefit/perquisite?
Any expenditure which is the liability of a person carrying out business or profession, if met by the other person is in effect benefit/perquisite provided by the second person to the first person in the course of business/profession.

Let us assume that a consultant is rendering service to a person “X” for which he is receiving consultancy fee. [n the course of rendering that service, he has to travel to different city from the place where is regularly carrying on business or profession. For this purpose, he pays for boarding and lodging expense incurred exclusively for the purposes of rendering the service to “X”. Ordinarily, the expenditure incurred by the consultant is part of his business expenditure which is deductible from the fee that he receives from company “X”. In such a case, the fee received by the consultant is his income and the expenditure incurred on travel is his expenditure deductible from such income in computing his total income. Now if this travel expenditure is met by the company “X”, it is benefit or perquisite provided by “X” to the consultant.

However, sometimes the invoice is obtained in the name of “X” and accordingly, if paid by the consultant, is reimbursed by “X”. In this case, since the expense paid by the consultant (for which reimbursement is made) is incurred wholly and exclusively for the purposes of rendering services to “X” and the invoice is in the name of “X”, then the reimbursement made by “X” being the service recipient will not be considered as benefit/perquisite for the purposes of section 194R of the Act.
If the invoice is not in the name of “X” and the payment is made by “X” directly or reimbursed, it is the benefit/perquisite provided by “X” to the consultant for which deduction is required to be made under section 194R of the Act.

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While we have exercised reasonable efforts to ensure the veracity of information/content published, we shall be under no liability in any manner whatsoever for incorrect information, if any.

WHAT IS BUYBACK OF SHARES?

Buyback of Shares is also known as Share Repurchase. The name itself suggests that buyback refers to the buying back of shares by the company from the shareholders in the open market at a premium. The repurchased shares are cancelled by the company and hence, reduce the outstanding shares in the market. Tax on Buyback of shares is now regulated by Section 115QA of the Income Tax Act,1961.

WHY DO COMPANIES BUYBACK SHARES?

• Correction of Share Price: Buyback of Shares generally results in increase in the market price. So, if the market price of the shares is highly undervalued, the company can correct it by buying back of shares.
• Promoter’s Shareholding: One of the main reasons behind buyback of shares is to increase the shareholding of the promoters by purchasing from the open market.
• Attractive Financials: With the reduced number of shares from buyback, Earnings per share of the company would increase. It also helps in improving the key financial ratios.
• Utilization of Excess Cash: By buyback of shares, company can use their excess cash balance by paying premium to the shareholders over and above the market price.

INCOME TAX ON BUYBACK ON SHARES AS PER SECTION 115QA

Initially, Section 115QA was applicable only to Unlisted companies but in the Union Budget 2019, it was announced that this section is now applicable to Listed companies also. The effect of this was applicable from 1^st July, 2019.

As per Section115QA, all the companies (both listed and unlisted) have to pay tax at the rate of 20% (plus Surcharge @ 12% and HEC @4%).

• Companies have to pay tax on the amount of distributed income on the buyback of shares.
• The tax shall be paid within 14 days from the date of payment to the shareholders.
• The amount of tax paid is not available for any credit.
• Every company shall pay tax on the distributed income in case of buyback of shares even if that company is not liable to pay income tax.

As per Section 115QA read along with Section 10(34A), shareholders are exempt from any kind of tax on buyback of shares. It would have been considered as double taxation if both shareholders and companies have to pay tax on buyback of shares. Therefore, only companies are liable to pay tax on buyback of shares.

TAX LIABILITY	BEFORE AMENDMENT	POST AMENDMENT (2019)
COMPANY (Both Listed and Unlisted)	No Tax Liability	The company is now liable for a buyback tax of 20% on the Distributed Income*
INDIVIDUAL SHAREHOLDER	Individual shareholders must pay Capital Gains Tax (Long term or Short term) depending on the holding period of shares	No Tax Liability

 

WHAT IS F&O TURNOVER?

Computing the turnover on Futures and Options is significant for the purpose of tax filing and F&O trading is mostly reported as business income while filing tax returns. Yet, one needs to analyze their total income, which can be positive or negative value (profit or loss). Expenses like office rent, telephone expenses, broker’s commission, etc. which are directly connected to F&O business should be deducted from the income. The remaining amount would be considered as the turnover from the F&O trading.

Traders are often faced with the challenge of calculating trading turnover from Derivatives and Intra-day. So, following are the formulas, using which, we can calculate the turnover:

TYPE OF TRADING	CALCULATION OF TRADING TURNOVER	TAXABLE UNDER THE HEAD	RATES
Equity Trading Intra-day	Absolute Profit/Loss [Sale price – Buy price]	Speculative Business Income	Respective Slab Rate
Futures – Equity, Commodity, Currency	Absolute Profit/Loss [Sale price – Buy price]	Non-Speculative Business Income	Respective Slab Rate
Options – Equity, Commodity, Currency	Absolute Profit/Loss* + Premium received from Sale of Options	Non-Speculative Business Income	Respective Slab Rate
Equity Delivery** Trading & Mutual Fund Trading	Total Sales Value of Shares/ Mutual Fund	Capital Gain	LTCG@10% STCG @15%
Debt Funds***	Total Sales Value of Debt Fund	Capital Gain	LTCG@20% with indexation STCG @ respective slab rate
Hybrid Funds	If: Equity Oriented > 65% = Equity Debt Oriented > 60% = Debt	Capital Gain	Respective slab rates as per Equity and Debt Orientation

*Profit & Loss both here are taken as positive figures.

**In case of Equity Funds, if the holding period is less than one year, it would be treated as Short Term Capital Gain.

***In case of debt funds, if the holding period is less than 3 years, it would be treated as Short Term Capital Gain.

We should understand this with the help of some examples:

Case 1: If Saurabh purchases 500 quantity of Equity Shares @Rs.50 and sells at Rs.57 on the same day (intra-day). His turnover would be determined as:

PARTICULARS	CALCULATION	AMOUNT
Profit on Sale of Shares	500 * (57-50)	3,500

Case 2: If Saurabh purchases 500 quantity of Futures @Rs.600 and sells at Rs.620. His turnover would be determined as:

PARTICULARS	CALCULATION	AMOUNT
Profit on Sale of Futures	500 * (620-600)	10,000

Case 3: If Saurabh buy 500 quantities of Options A @Rs.80 each and sells them at Rs.77. and he also purchases 250 quantity of Options B @ Rs.60 and sells at Rs.62. His turnover would be determined as:

PARTICULARS	CALCULATION	AMOUNT
Loss on Sale of Options A	500 * (80-77)	1,500
Premium on Sale of Options A	500 * 77	38,500
Profit on Sale of Options B	250 * (62-60)	500
Premium on Sale of Options B	250 * 62	15,500
Total Turnover		56,000

Case 4: If Saurabh buy 500 quantities of Equity Share A @Rs.80 each and sells them at Rs.87 after 13 months. He also purchased 250 quantity of Equity Share B @ Rs.60 and sells at Rs.62 after 4 months. His turnover would be determined as:

PARTICULARS	CALCULATION	AMOUNT
LTCG on Sale of Equity Share A	500 * (87-80)	3,500
STCG on Sale of Equity Share B	250 * (62-60)	500
Total Capital Gain		4,000

Note: Equity Share A has been taken under Long Term Capital Gain (LTCG) since they have been held as investment for more than one year.

F&O LOSSES AND TAX AUDIT

Intra-day stock trading is taxable under the head Speculative income/loss. Speculative loss can be adjusted only against the speculative income. However, any unadjusted speculative loss can be carried forward up to 4 years. F&O trading income/loss is covered under Non-Speculative business income. Any unadjusted business loss can be carried forward for 8 assessment years.

Tax Audit u/s 44AB is applicable when the trading turnover exceeds Rs.1 crore, but if the taxpayer has opted for presumptive taxation scheme, the limit for turnover is Rs.2 crores.

CONCLUSION

F&O trading has turned into an appealing proposition because of the accessibility of numerous trading platforms. Taxpayers often get confused while filing taxes about the income generated by F&O trading, and it is vital to comprehend the process to ascertain F&O turnover for income tax purposes, and when tax audit is applicable.

Section 40(B) of Income Tax Act provides the maximum permissible amount payable to a partner in a partnership firm. The returns of a partner can be in the form of

• Interest on Capital: Interest payable to partners shall be in accordance with the terms of the partnership deed, however, it shall not exceed 12% per annum.
• Share of Profit
• Remuneration: Remuneration payable to partners shall be in accordance with the terms of the partnership deed

ESTIMATION OF INCOME OF PARTNER IN A FIRM

The partner’s share in the total income of firm is exempt in the hands of the partner and hence would not be included in his total income. And due to this exemption, he cannot set-off his share of profits a firm’s losses.

INTEREST PAYABLE TO PARTNERS

There are few conditions which shall be fulfilled in order to be eligible for interest payable under section 40(B):

• The interest payable by a firm to its partners should be authorized by and in accordance with the partnership deed.
• The interest payable by a firm to its partners should not be for a period falling prior to the date of such partnership deed authorizing the payment of such interest.
• Interest payable to partners has a maximum cap of 12% per annum. Firm cannot pay any more than the prescribed limit.

Note: Interest here means simple interest and not compounding interest.

CONDITIONS FOR DEDUCTION UNDER REMUNERATION:

Remuneration to partners includes salary, bonus, commission, etc. Following conditions need to be satisfied for claiming the deduction:

• Remuneration shall be allowed only to working partners. Working Partner is a partner who actively engages in conducting the business affairs of the firm.
• Remuneration must be authorized by partnership deed and according to the terms of partnership deed.  Clear directions must be specified in the partnership deed.
• Remuneration paid to the working partners will be allowed as deduction but it should belong to the period as specified in the partnership deed. It should be related to the period of the partnership deed.
• It is not allowed if tax is paid on presumptive basis under section 44AD or section 44ADA.
• Remuneration payable shall be within the maximum permissible limits (as mentioned below). This limit is for total salary to all partners and not for any single partner.

CALCULATION OF BOOK PROFIT FOR PARTNER’S REMUNERATION U/S 40(B)

Book profit means the net profit as shown in the profit and loss account which is computed according to the manner laid down in the chapter IV-D. Book profit is calculated after some adjustments which are mentioned below:

• Net profit as per profit and loss account
• Add remuneration/salary/bonus/commission if already debited
• Add Brought forward business loss, deduction under section 80C to 80U if debited to profit and loss a/c
• Deduct interest if it is not deducted
• Make adjustments for expenses as per section 28 to 44D.

AMOUNT OF DEDUCTION:

BOOK PROFIT (Rs.)	MAXIMUM DEDUCTIBLE AMOUNT (Rs.)
Loss	1,50,000
Profit upto Rs.3,00,000	90% of book Profit or Rs.1,50,000; whichever is more
More than Rs.3,00,000	60% of the Book profit

TAXABILITY IN THE HANDS OF PARTNERS:

Remuneration is taxable in hands of partners as Business Income. Note that remuneration to partners is distant from the share of profits payable to partner since share of profits is exempt,  but remuneration is taxable in the income of partners.

Budget 2022 has hardened the income tax filing norms for regular taxpayers. Under Union Budget 2022, Nirmala Sitharaman announced that the provision of updated return is available in Section 139(8A) of the Income Tax Act. The taxpayers now have a choice to rectify their income tax return by filing an Updated Income Tax Return. The new provision allows the taxpayers to update their ITRs within two years of filing, on payment of additional taxes, in case of errors or omissions.

The Central Board of Direct Taxes (CBDT) has now notified a new Form ITR-U for documenting updated Income Tax returns in which taxpayers will have to give specific justification for filing it along with the amount of income to be offered to tax. The new Form ITR-U will be available to taxpayers for filing updated income tax returns for 2019-20 and 2020-21 fiscals. 

WHO CAN FILE AN UPDATED ITR?

Any person eligible to update returns for FY 2019-20 and subsequent assessment years as per the relevant provisions of the IT Act can file the updated return via Form ITR-U. A taxpayer can file updated return only once for each assessment year.

WHAT DETAILS ARE REQUIRED TO BE MENTIONED IN ITR-U?

In ITR-U, the assessee needs to specify only the amount of additional income, under the prescribed income heads, on which tax is required to be paid. No detailed income break-up needs to be submitted, as in the case of filing regular ITR forms. The taxpayer must also determine the exact reason behind updating the return in ITR-U. Further, it is required to mention the challan details for the additional tax paid for the updated return.

PRESCRIBED DATE TO FILE FORM ITR-U

Form ITR-U can be filed only for the preceding two years of the end of relevant assessment year. The provisions of section 139(8A) have been notified and came into effect from the beginning of financial year 2022-23, hence, in the financial year 2022-23, returns for AY 2020-21 and AY 2021-22 can only be furnished under Updated return.

MANNER OF VERIFICATION OF UPDATED RETURN

Updated return shall be verified using Digital Signature Certificate (DSC) in case of political parties and companies who are liable for tax audit under section 44AB.

In other cases, the taxpayers have an option whether they want to file with Electronic Verification Code (EVC) or DSC.

WHAT ARE THE BENEFITS OF FILING UPDATED RETURN?

1) Taxpayer gets an additional time of 24 months to file Income Tax Return even after the due date of filing Original ITR, Belated ITR and Revised ITR have lapsed

2) Taxpayer can report any missed out incomes and pay tax on it thus reducing chances of future tax notices and litigations

3) Tax Liability and penalty under Updated Return is less than in case of proceedings for undisclosed income or income escaping assessment

CASES WHEN AN UPDATED RETURN OF INCOME CANNOT BE FURNISHED

The Form ITR-U cannot be filed in case of following reasons:

• The provision does not allow the taxpayer to file the updated return if there is no additional tax outgo.
• Where a search has been initiated under section 132 or requisition is made under section 132A of the Income-tax Act
• Where a survey has been conducted u/s 133A other than survey u/s 133(2A) of Income-tax Act
• Where any proceeding for assessment or reassessment or re-computation or revision of income is pending under the Income-tax Act
• Where the Assessing Officer has information for Blank Money law, Benami law, etc. in the relevant assessment year.
• Where any information is received under an agreement referred to in sections 90 or 90A of the Income-tax Act
• Where any prosecution proceedings are initiated under the Income-tax Act.

PENALTY ON FILING UPDATED RETURN – PAY ADDITIONAL TAX UNDER SECTION 140B OF INCOME TAX ACT

The taxpayer filing an Updated Return must also submit proof of payment of tax and penalty as per Section 140B of the Income Tax Act.

The provision requires that the taxpayer has to pay an additional 25 per cent interest on the tax due if the updated ITR is filed within 12 months, while interest will go up to 50 per cent if it is filed after 12 months but before 24 months from the end of relevant Assessment Year. Non-payment of additional tax would be considered as invalid, and hence no return would be updated.

Therefore, the taxpayers looking to update their returns for FY 2019-20 will need to pay the tax due and interest along with an additional 50 per cent of such tax and interest. For those looking to file an updated return for FY 2020-21, the additional amount will be 25 per cent of the tax payable and interest.

NOTE: In case the taxpayer has not filed the Original return or Belated return, he/she will have to pay the taxes due for the relevant assessment year along with the late fees as per section 234F. He/she shall also pay the additional tax liability under section 140B of 25%/50% on the taxes due as per the circumstances.

UPDATED ITR U/S 139(8A) V/S REVISED ITR U/S 139(5)?

• A taxpayer can file an Updated ITR even if an original or belated ITR has not been filed. However, the taxpayer cannot file a Revised ITR if an original or belated ITR has not been filed
• The taxpayer can file an Updated ITR only if there is an additional tax liability. In the case of a Revised ITR, there is no such restriction
• The taxpayer need not pay any penalty for filing a Revised ITR. However, the taxpayer must pay a penalty in form of an Additional Tax of 25% to 50% as per Section 140B for filing an Updated ITR
• Updated ITR can be filed only if there is an additional tax liability and not if there is a reduction in tax liability or an increase in the refund or claiming a loss. Revised ITR can be filed for multiple reasons such as claiming a loss, increasing refund, reduction or increase in tax liability, etc.
• The taxpayer can file Revised Return multiple times while he/she can file Updated ITR only once.

Form 61A is a record of the statement of Specified Financial Transactions which must be furnished under the Income Tax Act, 1961 by certain institutions. Statement of Specified Financial Translations or SFT refers to information related to certain high-value transactions which specified persons are required to report to the income tax department. The SFT was earlier known as ‘Annual Information Return (AIR)’. The objective of SFT was to curb black money and widening the tax base.

APPLICABILITY OF FORM 61A

• A banking company, Cooperative bank
• A non-banking financial company (NBFC)
• Any institution issuing credit card
• Any person covered under audit under section 44AB of the Income Tax Act.
• Post offices
• A Nidhi referred to in section 406 of the Companies Act 2013
• A company issuing bonds or debentures
• A company issuing shares
• A mutual fund institution
• A company listed on the recognized stock exchange
• A trustee of a mutual fund or such other person as authorized by the trustee
• Authorize dealer, offshore banking unit, money changer or any other person defined in FEMA
• Inspector general or sub-registrar appointed under Registration act, 1908

KEY SECTIONS OF FORM 61A

The following are the key sections and details mentioned on a typical Form 61A:

• Full Name
• Permanent Account Number (PAN)
• Folio Number
• Address
• Financial Year in which the transactions carried out are being reported
• Number of Specified Financial Transactions
• Total Value of Specified Financial Transactions carries out in the financial year
• Details of the transactions: date of transactions, name of transacting party, PAN of transacting party, full address, mode of transaction, transaction amount, transaction code, etc.

Note that transactions that must be declared and reported in Form 61A.

TRANSACTIONS TO BE REPORTED

Individuals responsible for furnishing Form 61A	Type of Transaction and limit
Banking Companies and Co-operative Banks	Cash payment for the purchase of POs (Pay orders) / DDs (Demand drafts) for amounts annually totalling Rs 10 lakh or more.
Banking Companies and Co-operative Banks	Cash payment exceeding Rs 10 lakh for purchasing any prepaid RBI instruments like RBI bonds, etc.
Banking Companies and Co-operative Banks	Deposits or withdrawals amounting to Rs 50 lakh or more from any number of current accounts of a person with the bank.
Banking Companies, Co-operative Banks and Post Offices	Deposit totalling Rs 10 lakh or more in bank accounts, other than current or time deposit accounts, of a person.
Banking Company, Co-operative Bank, Post Master General of Post office, Nidhi	Cash payment aggregating to INR 1 lakh or more in a year or Rs 10 lakh or more in any other mode of payment against any credit card bill which is issued to a customer in a year
A company or an institution issuing debentures or bonds	Receipt exceeding Rs 10 lakh or more in a year from an individual for acquiring such debentures/bonds
A company issuing shares	Receipt exceeding INR 10 lakhs in a year from an individual for acquiring such shares. This includes share application money received.
Listed companies	Share buyback from a person for an amount totalling Rs 10 lakh or more
Manager/Trustee of a Mutual Fund	Receipt equal to or exceeding Rs 10 lakh in a year from an individual acquiring the units of such Mutual Fund
A Dealer of Foreign Exchange	Receipt from a person for sale of a foreign currency or expenses incurred in such foreign currency via a debit/credit card or via the issue of draft or traveller’s cheque or any other financial instrument for an amount annually totalling Rs 10 lakh or more.
Inspector-General/Sub-Registrar appointed under the Registration Act, 1908	Sale/Purchase by a person of immovable property for Rs30 lakhs or more of sale value or value as per the stamp valuation authority.
Persons liable for audit u/s 44AB of the Income Tax Act	Cash receipt exceeding Rs 2 lakh by a person for sale of goods or rendering of services (other than the ones specified above)

DIFFERENT PARTS OF FORM 61A

Form 61A has two parts:

Part A contains statement level information which is common for all transaction types. Based on the transaction type, the report level information has to be reported in one of the following parts:

• Part B (Reporting of aggregated financial transactions by the person)
• Part C (Reporting of bank accounts)
• Part D (Reporting of immovable property transactions)

PROCEDURE TO FILE SPECIFIED FINANCIAL TRANSACTIONS[SFT] ONLINE

• Register on the Reporting portal under ‘My Account‘ menu.
• All statements uploaded to the Reporting Portal should be in the XML format consistent with the prescribed schema published by the Income Tax Department.
• Once XML is generated, sign and encrypt the XML using the Submission utility and prepare a package to be uploaded.
• Submit the statement on Reporting Portal.
• Upon successful submission, an email with “Acknowledgment Number” will be sent to the registered email id.

DUE DATE & PENALTIES

• Due date for submitting Form 61A for the previous financial year is before 31st May of the applicable assessment year.
• For the initial failure to file Form 61A within the due date, penalty shall be levied under Section 271A of Rs.500 per day.
• The authorities would issue a notice to such an assessee, demanding the assessee to submit the form within 30 days from the issuance of such notice.
• In case of continuous default even after the notice, the penalty would be levied of Rs.1,000 per day.
• The penalty of Rs.1,000 would be calculated after the stipulated time as mentioned in the notice expires.

CONSEQUENCES FOR FILING DEFECTIVE FORM

• If the reporting entity or individual discovers any inaccuracy or discrepancy in the information provided in Form 61A then it shall make the required corrections with the authorities within 10 days.
• In case the income tax authorities fond out that the report is incomplete or defective, the reporting entity or individual is given 30 days from the date of intimation to rectify it.
• Penalty of Rs.50,000 is levied on the reporting entities and individuals in case:
  • Inaccurate information is provided deliberately.
  • Inaccurate information is submitted but does not inform it and does not correct it within 10 days.

WHAT IS ANGEL TAX?

Angel tax essentially derives its genesis from section 56(2) (vii) (b) of the Income Tax Act, 1961. Angel Tax is the tax levied by the government on the start-ups who receive funding from Angel Investors.

Angel investors get benefits in the form of taxation as the entire investment made by investors is not taxed. Angel tax is imposed on the capital raised by the means of issue of shares by unlisted companies from an Indian investor if the share price of issued shares exceeds the fair market value of the company. The excess realization is considered as income and therefore, taxed accordingly under the head ‘Income from other Sources’.

Note that Angel Tax isn’t applicable in case of investments made by Venture Capital Firms or Foreign Investors. It’s limited to investments made only by Indian Investors.

WHO IS AN ANGEL INVESTOR?

An Angel Investor is a high-net-worth individual who provides financial backing for small start-ups or entrepreneurs, typically in exchange for ownership equity in the company. They are also known as a private investor, seed investor or angel funder. The funds that Angel Investors provide may be a one-time investment to assist the business get off the ground or an ongoing injection to support and carry the company through its difficult beginning stages. Angel investors usually give financial support to start-ups at the initial moments (where the risk of failing is relatively high) and when most investors are not prepared to back them up. They are the one who invests his money in a startup while it is still finding its feet and still struggling to establish itself in the marketplace.

As per the Income Tax Notification, Angel Investors with the minimum net worth of INR 2 crore or the average return of the income of more than INR 25 lakhs in the preceding 3 financial years will be eligible for full tax exemption (100%) on the investments that are made in the start-ups above the fair market value.

PURPOSE BEHIND ANGEL TAXATION:

The primary reason for the introduction of the ‘Angel Tax’ was to tax the excessive share premium received over and above the fair market value (FMV) by the private companies, which was widely being used as a mechanism for disclosure for unaccounted money or black money. Thus, this is one of the anti-abuse provisions introduced to prevent money laundering.

One more explanation for this is since just a minor level of the population follows the tax collection necessities (which include just 2% of the complete population), a large portion of the new businesses don’t keep up with legitimate books of record and show of their assets legibly. Due to this flaw, the income tax department of India is of view that the valuation of companies needs to be done by special officers based on prescribed guidelines and formulas. This will assist the department to do the proper valuation of assets of the company, which shall further lead to higher tax payment.

ANGEL TAX RATE

Angel Tax is levied on the start-ups at a rate of 30% (excluding cess) on the Premium received. The Premium here is calculated as the difference between the net investments in excess of the fair market value.

ELIGIBILITY CRITERIA FOR STARTUP RECOGNITION:

In order to be eligible for acquiring funds by Angel Investors, the company (start-ups) need to meet certain criteria, i.e.:

i. The Start-up should be incorporated as a private limited company or enlisted as a partnership firm or a limited liability partnership.

ii. An entity shall be considered as a start-up up to 10 years from the date of its incorporation.

iii. Turnover should be less than Rs.100 Crores in any of the preceding financial years.

iv. The company remains a start-up if the turnover per year does not cross the Rs 100 crore marks in any of the 10 years. Once the company crosses the limit, it no longer remains eligible to be called a Start-Up. The limit of Rs 100 crore has been upgraded from Rs.25 crore by the Indian government in the recent past.

v. Further in the calculation of threshold of INR 25 crores, the amount of paid-up share capital and share premium in respect of shares issued to any of the following persons will not be included:

• A Non-resident or

• A Venture Capital Company pr
• A Venture Capital Fund

vi. The firm should have approval from the Department for Promotion of Industry and Internal Trade (DPIIT)

vii. The Start-up should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth.

viii. An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Start-up.”

BENEFITS AVAILABLE TO AN ELIGIBLE START-UP:

Following benefits shall be available to an eligible start-up or its shareholders:

1. Exemption from levy of angel tax under Section 56(2) (vii) (b);

2. Deductions under Section 80-IAC of the income tax Act

3. Liberalized regime of Section 79 to carry forward and set-off the losses

4. Exemption under Section 54GB to the shareholder for making investment in a startup;

5. Access to the dedicated cell created by the CBDT to resolve the issues faced by the Start-Ups.

SECTION 80(IAC):

Tax Exemption under Section 80 IAC of the income Tax Act, 1961: A Start-up may apply for Tax exemption under section 80 IAC of the Income Tax Act. Post getting clearance for Tax exemption, the Start-up can avail tax holiday for 3 consecutive financial years out of its first 10 years since incorporation.

Eligibility Criteria for applying to Income Tax exemption (80IAC):

• The entity should be a recognized Start-up;
• Only Private limited or a Limited Liability Partnership is eligible for Tax exemption under Section 80IAC;
• The Start-up should have been incorporated after 1st April, 2016 but before April 1, 2021

Profit Exemption to eligible Start-up entities under Section 80-IAC:

100% of its profits and gains is allowed as deduction to an eligible start-up for 3 consecutive assessment years out of the 10 years (beginning from the year of incorporation).

As per Section 80-IAC, an entity shall be considered as an eligible start-up if it satisfies the following criteria:

• It is incorporated as a company (Private Ltd. Co. or Public Ltd. Co.) or an LLP.
• It is incorporated on or after April 1, 2016 but before April 1, 2021.
• Its turnover does not exceed Rs.25 Cr (Rs.100 Cr from 01.04.2020) in the previous year relevant to assessment year for which such deduction is claimed.
• It is not formed by splitting up or reconstruction of a business already in existence.
• It holds a certificate of eligible business from the Inter-Ministerial Board of Certification.
• It is engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation.

SECTION 56:

ANGEL TAX UNDER SECTION 56(2) (VII) (B) OF THE INCOME TAX ACT –

Angel tax is the tax charged on the closely held company when it issues shares to any resident of India at a price which exceeds its fair market value. When this provision is triggered, the aggregate consideration received from issue of shares which exceeds its fair market value is charged to tax under the head ‘Income from other sources’ under section 56(2) (vii) (b).

TAX EXEMPTION UNDER SECTION 56 OF THE INCOME TAX ACT (ANGEL TAX)

Post getting recognition, a Start-up may apply for Angel Tax Exemption. A start-up shall be eligible for claiming exemption from levy of angel tax under section 56(2) (vii) (b) if following conditions are satisfied:

• The entity should be a recognized Start-up;
• Aggregate amount of paid-up share capital and share premium of the Start-up after the proposed issue of share, if any, does not exceed INR 25 Crore.

CONDITIONS FOR EXEMPTION FROM ANGEL TAX TO BE FULFILLED

An eligible start-up shall get exemption from Angel Tax as given u/s 56(2) (vii) (b). However, the exemption is provided subject to the condition that the start-up should not invest, within 7 years from the end of the latest financial year in which the shares are issued at a premium, in any of the following:

• Building or land for the purpose (other than own use or as stock in trade or for the purpose of renting);
• For advancing loans (other than where the lending of money is the substantial part of the business of the start-up);
• Capital contribution to any other entity;
• Shares and securities;
• Motor Vehicle, aircraft, yacht, or any other mode of transport, the actual cost of which exceeds INR 10 Lakhs (other than that held by the start-up for the purpose of plying, hiring, leasing, or as stock-in-trade, in the ordinary course of business;
• Jewelry (other than that held by the start-up as stock in the ordinary course of business);
• Archaeological collections & Artifacts etc.

PROBLEMS WITH ANGEL TAX:

According to the Income Tax Laws of India, 30% of the investment made to a start-up is charged in the form of Angel Tax. This implies that a start-up is losing almost around 33% of the investment made to it in the form of tax. Angel tax is taking a huge toll on start-ups. A start-up company already has a lot on its plate. They have problems to handle and losing a tremendous portion of their investment in the form of tax is just not acceptable.

There are many reasons due to which startups are opposing this concept of angel taxation along with investors. As investors are reluctant to invest in Indian startups due to this concept, it imposes higher tax amount on them. Certain reasons are as mentioned below:

• Payments made by Indian Residents are only liable for Angel tax. This means that if a start-up is funded by a resident Indian, then the start-up has to pay a certain share of this investment in the form of angel tax.
• Investments made by non-resident investors and venture capitalists are not liable for Angel Tax deduction.
• Angel taxation has halted the development and growth of startups, leaving them disheartened.
• Due to large amount of taxation to be paid, many investors are avoiding making an investment in the market which has a huge impact on Indian industries as many large investors are avoiding funding due to the reason.
• The imposition of angel tax hinges on the fair market valuation of the company and this has been a bone of contention between startups and the income tax department. The tax department goes by the rule book and calculates market value based on the net assets of the company. However, estimated growth prospects of the startup and future projections based on these growth prospects are major factors in determining the fair market valuation of the startup. The methodology difference in calculation of the market value of the startup makes it pay a hefty price in terms of angel tax at a whopping 30%. Angel tax in a way wipes away a major part of the investible surplus of the startup hurting its growth prospects and hitting hard on the viability of the business.

However, after facing a sustained backlash from the startup ecosystem against the imposition of angel tax, the government has finally assured the startups that no coercive action will be taken to collect angel tax and also appointed a committee to look into this issue.

WHAT ARE INITIATIVES TAKEN BY THE GOVERNMENT IN THIS REGARD?

To advance the startup industry, the government has taken some steps with regard to Angel Taxation as:

• Earlier, a company was regarded as a startup for a period of 7 years from the date of its incorporation. But now it has been increased to 10 years in order to provide benefits in terms of income tax for a further three years.

• Further, the limit for turnover has also increased from Rs.25 crores to rs.100 crores for the said financial year for the criteria to be regarded as a Start-up company.

In the case said entities meet the criteria as defined by the government, then exemption from angel taxation shall be given.

CONCLUSION

Regardless the fact that Angel tax was started with good intention, it has experienced many kickbacks. Angel Tax is deeply disapproved of by start-ups and investors alike. This has brought about a precarious decrease in the advancement of start-ups as they have spare funding. Investors, on the other hand, are also shying away from making investments in small companies. There are still many challenges that Startups and Investors are facing. This has completely disturbed the equilibrium and has made start-up survival all the tougher.