Some relief for startups and investors over Angel Tax; real actions yet missing

Even after 30 months of the tussle over draconian Angel Tax on startups, the government continues to pass on multiple notifications and circulars without solving real pain of entrepreneurs. In yet another notification, Commerce Ministry has eased out several demands of startups over Angel Tax.

But on the ground, not much has changed for them.

The only significant development for suffering startups is that instead of DIPP, the Central Board of Direct Taxes (CBDT) will look after exemption applications made by startups.

Going forward, startups will apply for an exemption to the DIPP first. Then the application go to CBDT for detailed audit and action.

Commerce Minister Suresh Prabhu has given nod to make required changes, especially Section 56(2) (viib) of the Income Tax Act clause, and make allowances for angel investors, said a PTI report quoting sources.

As per Section 56(2) (viib) 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.

Till now, a large chunk of angel-backed startups are levied around 30 per cent Angel Tax on investments made by external investors.

CBDT has been mandated to grant exemption approval to startups or they can decline it within a period of 45 days from the date of receipt of application from DIPP.

As per revised procedure, startups now don't need to apply to an inter-ministerial board of certification for approval. They also exempted from submitting a report from merchant banker specifying the fair market value of shares.

Importantly, startups are also no longer necessarily required to collect information about angel investors investing in them.

The detail report in this regard can be found in below Tweet thread by DIPP.

As it was in the past, startups need to give account details and return of income (RoI) for the last three years. Investors in them also have to provide their net worth and RoI. As per industry figure, about 400-500 startups get angel funding every year in India.

The revised policy also includes full tax concession on investments up to Rs 10 crore from angel investors.

In the last couple of months, startups have been complaining about getting multiple IT notices on angel investment. Despite the government assurance, they kept receiving notices. The Angel Tax was widely criticised by entrepreneurs and veterans in the Indian startup ecosystem.

While some relaxation to startups and angel investor are indeed positive move and welcomed by the ecosystem, startups who have been facing harassment and eyeing for exemption didn’t get any immediate relief.

Unlike DIPP, the startup stakeholders hope that CBDT would address the long concerning issues on Angel tax swiftly.

Let’s assume that like the series of ineffective notifications, the government isn’t passing the bucks from one department to another.