February 15, 2018

Startups in India can expect some relief in coming day from the government on the issue of the tax infamously referred as the “Angel Tax”.

According to a report by The Economic Times, the government is planning to exempt start-ups that have been incorporated before 2016 and have raised angel funding up to Rs 10 crore.

At an event, Ramesh Abhishek, department of industrial policy & promotion (DIPP) secretary said that the difference between the valuation of the start-up upon receiving funding and the assumed fair value will not be considered as an income and that the department will issue a notification in this regard.

NITI Aayog CEO Amitabh Kant also reiterated that the government is working towards a solution to angel investors and entrepreneurs on the matter of “Angel Tax” at the same event — LetsVenture’s annual conclave. It is interesting to note that Revenue Secretary Hasmukh Adhia recently has said that there is no such tax called “Angel Tax”.

Under Section 56 (2) (vii) (b) of the Indian Income Tax Act, was included in the Finance Bill, 2012 by the then Finance Minister P Chidambaram which stated that any capital raised by a closely held company (or start-ups) which is above its Fair Market Value (FMV) it will be treated as an ‘income from other sources’ and will be taxed accordingly. However, startups incorporated after 2016 under the Startup India plan are exempted from this tax.

It was done to curb tax evasion and to stop the conversion of black money into white through the premium on shares, however, start-ups have been long demanding relief from the government. This tax, however, does not pertain to only start-ups but any business where the capital raised is higher than its fair market value.

With the provision being widely called as “Angel Tax” has been giving the impression that the government is levying a tax specifically on start-ups raising funding. The Income Tax department has been reported to have issued a number of notices including to start-up companies, which was done after the valuation of the company were found more than the Discounted Cash Flow (DCF) value.

FICCI in its pre-Budget memoranda had asked Arun Jaitley to delete of the provision altogether in case of immovable property, saying that it was leading to double taxation.

[The Financial Express]