Angel Tax: PE & VC body proposes exemption of Rs 10 crore for startups

In its three-step proposals, the Indian Private Equity (PE) and Indian Venture Capital Association (IVCA) has asked Central Board of Direct Taxes (CBDT) and the Department of Industrial Policy and Promotion (DIPP) to exempt Rs 10 crore to all registered startups.

The proposal is based around the anti-abuse provisions in the income tax law for startups commonly known as Angel tax. It also suggested excusing HNI investments made through verified funds and VCs from IT notices.

Further, it appealed to exempt registered startups, which have PAN numbers of all its shareholders.

Talking about the proposal, Gopal Srinivasan, former chairman, IVCA said that we don't demand any changes in the existing law but to make provisions understanding the limitations of the startups.

Earlier, the issue of Angel Tax was raised by startups, who got multiple income tax notices demanding taxation and explanation on their fundraising from angel investors.

More than 60 startups complained about Angel Tax and demanded a corrective measure to be taken in this regard from the govt. The major concern was raised on Section 56 of the Income Tax Act, which says if a closely held company issues its shares at a price more than its fair market value.

The amount received in excess of the fair market value will be charged as income from other sources.

Angel Investment is generally defined as early stage fund that helps startup stand on its feet to fight competition and survive in the market. Startups are levied around 30 per cent Angel Tax on investments made by external investors.

The Angel Tax was widely criticised by prominent voices in the Indian startup ecosystem such as Mohandas Pai and Kunal Bahl among several others.

Last week, the commerce minister Suresh Prabhu had assured startups to come up with a solution on Angel Tax.

The development was reported by ET.