Govt swings into action on startups complaints over Angel Tax, says will protect bonafide investment

After several startups complain over receiving 'Angel tax' notices, the govt has finally swung into action. It has said that the bonafide investments in startups will not be taxed for exceeding fair market valuation.

The department of industrial policy and promotion (DIPP) said that it has taken up the issue of notices with the Department of Revenue. Now it will ensure that there is no harassment of Angel Investors or Startups.

It further said DIPP has placed a mechanism since 2018 to grant exemption from the provisions of Section 56(2) (viib) of the Income Tax Act to genuine investors in recognised startups.

The Department has again taken up this matter of issue of notices with the Department of Revenue so that there is no harassment of Angel Investors or Startups. @rabhishek1982

— DPIIT India (@DIPPGOI) December 19, 2018

DIPP, in consultation with the Department of Revenue, has put in place a mechanism since April 2018 to grant exemption from the provisions of Section 56(2)(viib) of the Income Tax Act to genuine investors in recognised startups. @rabhishek1982

— DPIIT India (@DIPPGOI) December 19, 2018

The act treats share premium received from the sale of unlisted shares in excess of their fair value taxable as income from other sources. This is to keep in check unlawful activities such as taking a bribe in the guise of a premium for shares in unlisted firms.

However, the govt has exempted startups from this provision. And it is committed to protecting bona fide investment into startups, said DIPP.

Earlier, the issue of Angel tax was raised by entrepreneurs and startups, who received angel tax notices. A group of over 60 startups had complained to the government on the issue of Angel tax. It got supported by prominent voices in the Indian startup ecosystem such as Mohandas Pai and Kunal Bahl.

Entrackr was first to report the issue and sought for govt intervention over draconian tax. Commerce minister Suresh Prabhu had acknowledged the issue and said to directed it to the finance ministry to resolve.

We have taken up the issue https://t.co/N14IZm8gVY

— Suresh Prabhu (@sureshpprabhu) December 18, 2018

In the last couple of months, startups have been receiving notices to pay additional tax or premium on a higher valuation. In November, the Ministry of Corporate Affairs (MCA) had issued notices to over 2000 startups who raised investment in the last five years.

The ministry questioned investors premium and valuations at which they raised money. It is also seeking details on whether these startups have asked for exemptions under any government scheme.

Startups are forced to pay tax on the amount that is considered above ‘fair value’ valuations, which is primarily evaluated on the basis of discounted cash flows.

Currently, startups are levied around 30 per cent angel tax on investments made by external investors.