Angel tax goes for start-ups registered with DPIIT

Also, a dedicated cell, headed by a member of the Central Board for Direct Taxes (CBDT), will be set up to address concerns faced by start-ups.

Illustration: Uttam Ghosh/Rediff.com.

The government on Friday exempted all start-ups that are registered with the Department for Promotion of Industry and Internal Trade from the so-called 'angel tax', which will help resolve difficulties faced by the fledgeling businesses and their investors.

"To mitigate genuine difficulties of start-ups and their investors, it has been decided that Section 56(2)(viib) of the IT Act shall not be applicable to a start-up registered under DPIIT," Finance Minister Nirmala Sitharaman told reporters in New Delhi.

She added that while the said section will continue to be part of the Income Tax Act, it will not be applicable to the start-ups registered with the DPIIT.

Besides, a dedicated cell, headed by a member of the Central Board for Direct Taxes (CBDT), will be set up to address concerns faced by start-ups.

"After this, if there is a difficulty, it has been decided to set up a dedicated cell under a member of the CBDT. Any start-up that has an issue can approach the cell for quick resolution of the problems," she said.

Multiple start-up founders had claimed that they have received notices under Section 56(2) (viib) of the Income Tax Act to pay taxes on angel funds raised by them.

Welcoming the decision, Indian Angel Network Fund Founding Partner Padmaja Ruparel said she was optimistic that these steps "will empower the Indian start-up ecosystem by pruning the lingering problems with the angel tax".

S R Patnaik, partner and head (taxation) at Cyril Amarchand Mangaldas, said the move to exempt registered start-ups will "absolve" them from being harassed by the tax authorities.

"The FM has also assured the industry that tax authorities will not 'overreach'. This is a very welcome statement and should provide a lot of comfort to the industry," Patnaik added.

An angel investor puts funds in a start-up when it is setting up its business. Normally, about 300-400 start-ups receive angel funding in a year. Their investment in a unit ranges between Rs 15 lakh and Rs 4 crore.

Section 56(2)(viib) of the I-T Act provides that the amount raised by a start-up in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent.

Touted as an anti-abuse measure, this section was introduced in 2012. It is dubbed as 'angel tax' due to its impact on investments made by angel investors in start-up ventures.

Vikas Vasal, partner and national leader (tax) at Grant Thornton India LLP, pointed out that the government has been proactive in addressing the concerns of start-ups and has taken a number of measures in the recent past in this direction.

"Removal of angel tax will go a long way in building trust and confidence in the start-ups and the investors, and shows government's resolve towards ease of doing business in India and encourage entrepreneurship," he said.

HomeLane.com founder and CEO Srikanth Iyer said the waiver of 'angel tax' and simplification of flow of risk capital to young companies will allow early-stage ventures to raise seed capital.