Angel tax relief to startups

Angel Tax refers to a money pool created by high net worth individuals or companies, generally called as angel investors, for investing in business startups. Various startups founder claimed that they received notice under section 56(2) (vii) (b) of Income Tax Act (“Act”) from Income Tax Department (“Department”) to pay taxes on angel funds raised by them. Entrepreneurs have raised their concern on such tax notices. However, India is likely to soon announce the concessions to shield startups from the angel taxes. The changes will be made to the conditions specified under section 56(2) (vii) (b) of the Act to remove any ambiguity and allow exemption for past as well as proposed investments that do not exceed INR 10 crores.

Meaning of angel tax
With an intention to promote entrepreneurship in India, government has loosened the condition for startups and investors to shield them from what has been called angel tax. Angel tax is a term referred to the income tax payable on capital raised by unlisted companies via issue of shares where the share price is seen in excess of the fair market values of the share sold. The excess realization is treated as income and taxed accordingly. This tax was introduced in the year 2012 Union Budget by the finance minister Pranab Mukherjee to seize and desist money laundering practices.

Relaxation on Angel Tax
In the latest development, the government has redefined the meaning of startups. The relaxations are made per the vision to boost the startup culture in India. The new rules are expected to catalyse business enterprises by exempting angel tax on the funds that they have received from the investors.

This move has opened paths for large conglomerates and alternative investment funds to invest in startups without getting taxed on valuations. The new bill will also allow startups to avail tax-free holiday up to three years during the 10-year period and the investment limit has been raised from 10 crores to Rs 25 crores for availing tax exemption. Now, with the higher exemption limit, the majority of the angel investment would wind up qualified for exclusion from the tax.

Current scenario
CBDT will soon be set for processing requests from startups and angel investors for exemption to speed up the process. DIPP will meet stakeholders to seek feedback in the first week of February 2019 to discuss all policy and implementation issues. New framework regarding the same will be announced on 16 February. Helping hand that is CBDT will set up cell to process exemptions applications. Latest notification issued by DIPP lays down a process for startups to obtain an exemption from angel tax.

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