New Delhi, February 6, 2018

Startups incorporated before 2016 that have got up to Rs 10 crore in angel funding won't face the so-called angel tax, once changes in the regime are finalised by the Department of Industrial Policy and Promotion (DIPP), which will soon notify the amendment, a senior government official told ET.

It will also set up a separate committee for the recognition of such startups so that they get the relief, he said.

"We have finalised the conditions which will resolve the issue of pre-2016 startups," the official said.

This will ease the concerns of about 300 startups that received funding from the Angel Investors Network. ET reported on February 5 that DIPP was working to provide relief to startups incorporated before 2016. Startups incorporated after 2016 and recognised under the Startup India policy are spared this tax.

"We will have adequate safeguards that would be taken into account when a startup is examined for recognition," said the official.

Discussions with Experts
The angel tax was introduced by then finance minister Pranab Mukherjee in the finance bill of 2012. The measure was aimed at tackling the laundering of money through high premiums on shares. The tax is applicable on the capital raised by unlisted companies in excess of the fair market value of their shares.

The law reasons that this excess amount is akin to "income from other sources" and should be taxed under Section 56 (II) of the Income Tax Act. This route has been prone to misuse for conversion of black money into white. The income tax authorities had issued a number of notices under this provision with some of them being sent to startups.

With the recognition of startups that were floated prior to the launch of the policy, the tax issues faced by these entities is expected to be resolved. DIPP has had extensive discussions with sector experts and the industry before getting ready to finalise the latest framework. The income tax department has also asked assessing officers not to take precipitate action in cases relating to startups.

Finance secretary Hasmukh Adhia had told ET earlier that it was wrong to call the levy an angel tax.

"We take valuation both on book value as well as discounted cash flow, certified by chartered accountant... If you get a valuation which is higher than DCF value, then we tax it. This is not an angel tax — this is an anti-evasion measure for us," he said. "But we have said that no adjustment will be made if it is a DIPP-recognised startup.

[The Economic Times]