Startups involved in merger and acquisition would lose Angel Tax immunity

After the government came up with 200% penalty for startups not complying with the norms last month, it now has introduced latest conditions for Angel Tax immunity once the startup gets registered with the Department of Industrial Policy and Promotion (DIPP).

While the Angel Tax continues to still keep over hundreds of startups on tenterhooks, the government coming up with less palliative merger and acquisitions (M&A) conditions is a matter of concern for the startups.

As per the clause, startups who go for M&As would have to face angel tax scrutiny. Companies will lose immunity from angel tax, once they opt for M&As and also, no investment in any shares or securities can take place hampering M&As.

The above-mentioned conditions are introduced to promote genuine startups and curb the misuse of Angel Tax exemption.

Further, the tax department would interrogate about the premium paid by investors in startups at valuations that continued to increase even as revenue reduces. The condition is applicable if the investor is not an Indian. Such investments would be considered as “unexplained cash credits” with a charge of 30% tax on them.

There are investors who merge some of their portfolios in order to have a better imprint. All startups don't consequently invest money when they go for M&As.

Many times, two entities put together to survive and grow better in the market. 

Meanwhile, experts believe that the exemptions are given for use of funds in growing startups' own business, not for them to become an angel investor as it would neglect the sole purpose of angel tax provision.

Though, they also suggested to give case- by- case approval for exceptions to DIPP.

This development was first reported by ET.