Government To Exempt Angel Tax In An Attempt to Promote Startups

Saturday morning brought in good news for the Startup ecosystem, the government has removed the so-called ‘Angel Tax’ for investors providing funding to startups in order to fuel their ambitious plan to boost entrepreneurship and job creation in the country.
Funding to startups, notified under the government-approved plan stated by PM Narendra Modi, will not face tax even if it exceeds the face value.

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So, resident angel investors, domestic family offices and domestic funds which were not registered as venture capital funds need not worry about the invested amount getting taxed.
Keeping in mind the existing rules, funds raised by an unlisted company through equity issuance are covered under this tax which is in excess of the fair market value.
This extra inflow is taxable as ‘income from other sources’ under section 56(2) of the Income-Tax Act including the corporate tax rates which contributes to over 30% of just taxes. In such cases, startups would lose a good chunk of the inflow to the so-called ‘angel-tax.’

All thanks to the Central Board of Direct Taxes who have issued a notice to this effect, exempting startups raising investments from the spartan of Section 56(2).

“This has been long awaited and is a very welcome step. The abolition of this so-called ‘angel tax’ has been a long-standing demand of the industry,” said Amit Maheshwari, partner, Ashok Maheshwary &Associates LLP. However, earlier investments can still be questioned by tax officers as being overvalued in the light of declining valuations globally and in India, he said.

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