Angel tax is refer 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 value of the shares sold.
The term Angel tax has again triggered anxiety among the Indian startups as it's being reported that many startups are receiving income tax notices on angel funding they received few years ago. Taking note of the issue, Centre has said that the government has setup a committee to review the entire situation.
But before we discuss it further, let us first know what is Angel tax.
Angel tax is refer 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 value of the shares sold. The term was first used by Pranab Mukherjee in his 2012 Budget speech.
The angel tax is triggered when any start-up raises equity funding in excess of its fair valuation. The premium is treated as income, attracting over a 30 per cent tax.
Recently, a number of companies have complained that they have received tax notices and that in at least one case funds were withdrawn by authorities from a company’s bank account.
Can startup be exempted from angel tax?
Yes. Last month, the government eased the procedure for seeking income tax exemption by startups on investments from angel funds and prescribed a 45-day deadline for a decision on such applications of budding entrepreneurs.
The new procedure says that to seek exemption, a startup should apply, with all documents, to DPIIT. The application of the recognised startup shall then be moved to the CBDT.
Startups will have to provide account details and return of income for last three years. Similarly, investors would also have to give their net worth details and return of income.
What did the government say?
Finance Minister Piyush Goyal said on Monday said the government will not go after start-ups raising funds through legitimate means, responding to the criticism over the “angel tax”.
Replying to the debate on the interim Budget for 2019-20 in the Lok Sabha, Goyal also said he could have easily kept the fiscal deficit for 2018-19 at 3.3 per cent of gross domestic product, but did not in order to present an “honest Budget”.
“The Opposition has raised the issue of angel tax. It has no understanding of the issue. There is nothing called angel tax. In the Congress’ time, fake companies use to sell shares at a premium. When we acted against them, the party is feeling the pinch. Genuine companies need not worry, only fake companies are concerned as we have tightened the noose on them,” Goyal said.
Govt may exempt DPIIT-certified startups from angel tax
The government is considering giving complete exemption to startups from angel tax once they are certified by the Commerce and Industry Ministry, a move aimed at helping budding entrepreneurs, official sources told PTI.
Officials of the department for promotion of industry and internal trade (DPIIT) and Central Board of Direct Taxes (CBDT) are holding series of meetings to address the angel tax issue, the sources said.
1. Startups receiving I-T notices
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Various startups have raised concerns on notices sent to them under the Section 56 of Income Tax Act to pay taxes on angel funds received by them.
2. What could be done?
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"One of the consideration being though about actively is to give complete exemption to startups from Section 56(2)(viib) of the Income Tax Act, once they are certified by the DPIIT," sources told PTI.
This move may be gelled with capping the investment to a much higher level of angel funds so that a good number of startups do not face the taxmen.
A notification in this regard is expected to be issued by the department and board soon.
3. Will it fulfil startups demands?
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Though startups are demanding complete exemption from this tax, the government may increase investment limit for tax exemption to Rs 25-40 crore.
Section 56(2)(viib) of the Income Tax Act provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent.
4. What is a startup?
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As per the Startup India action plan, startup means an entity, incorporated or registered in India not prior to five years, with annual turnover not exceeding Rs 25 crore in any preceding financial year, working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.
