Startups yet feel the burden of Angel Tax despite of government simplified procedures

NewsBharati    21-Jan-2019
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New Delhi, January 21: Benefits of the changes notified by the Department of Industrial Policy and Promotion (DIPP) on the angel tax may not apply to all startups. The government said it has already simplified the procedure for startups to seek exemption from angel tax. Startups shall now apply to the DIPP with documents related to their financials and the details of their investors, including their net worth and returns. However, the CBDT will decide on their eligibility for the exemption within 45 days.
 

 
DIPP said that startups have been given more freedom to claim exemption from the tax demanded on investments by angel investors at valuations deemed disproportionate to their earnings and revenue growth. While the Central Board of Direct Taxes (CBDT) is expected to soon issue a circular directing field officials not to press for payment in instances where assessment orders and firm tax demands have already been sent, some of the conditions may restrict relief.
 
According to the DIPP, for exemption from the tax, an investor should have returned income of Rs 50 lakh or more for the financial year preceding the year of investment and a net worth exceeding Rs 2 crore, or the amount of investment made or proposed, whichever is higher.
 
This comes after various letters were posted to PMO’s office stating the issues faced by the assesses citing the angel tax. “Start-ups are in distress and many feel victimised mainly due to the subjectivity, cost and arbitrariness involved in the implementation of this anti-evasionary measure which treats every assessee as guilty until proven innocent”, stated the letter. Among the signatories to the open letter was Sreejith Moolayil, co-founder of TrueElements, a health foods start-up. “I got a notice from I-T officials in December 2017, asking me to pay Rs 40 lakh as tax on a Rs 1 crore angel funding I had secured in 2015. I was slapped with another notice in December 2018.” These specifically claim that the new angel tax exemption rules does nothing to comfort the startups.
 
What is Angel Tax?
Angel tax is a term referred to 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 excess realisation is treated as income and taxed accordingly. The tax was introduced in the 2012 Union Budget by then finance minister Pranab Mukherjee to arrest laundering of funds. It has come to be called angel tax since it largely impacts angel investments in startups.
 
Is an exemption available under this tax?
The government issued a notification in April 2018 to give exemption to startups under Section 56 of the Income Tax Act in cases where the total investment including funding from angel investors did not exceed Rs 10 crore. According to the notification, the exemption would apply only when the angel investor had a minimum net worth of Rs 2 crore or an average returned income of over Rs 25 lakh in the preceding three financial years.