Govt set to form working group on angel tax issue

DPIIT Secretary Ramesh Abhishek said startups gave many suggestions in the meeting that will be looked into by the working group. “We had a roundtable on resolving the issue of angel tax. We have a number of suggestions. We will form a small working group and try to come out with some suggestions and solutions in the next 4-5 days,” he told reporters after the meeting. He also said the CBDT has asked its officers not to take any coercive action against them.

The meeting comes against the backdrop of various startups raising concerns on notices sent to them under Section 56(2) (viib) of I-T Act to pay taxes on angel funds.

CBDT member Akhilesh Ranjan said that investors, entrepreneurs and founders have raised this issue and they were explained why this tax provision exists in statute. “We do not want to tax startups under that provision, (but) we want somebody to define what is a startup,” he said adding there should be some parameters for startups.

Ranjan further said income tax officers have already been instructed not to enforce recovery of angel tax and dispose of their appeals on priority. “Number of notices is much less. Tax notices are also less in number,” he said.

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. The Centre did away with the requirement for start-ups to have the fair market-value of their shares ascertained by a merchant banker.

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 CBDT. A startup recognised by DPIIT would be eligible to seek exemption, subject to certain conditions. 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.

Under the Section 56(2)(viib) of the Income Tax Act, closely-held companies, when issuing shares, are charged 30 per cent tax on the difference between funds raised as per the actual valuation and the fair-market value of the company. This, within the start-up community, is known as the angel tax.

However, start-ups with angel investment following certain criteria are allowed to seek exemption from this tax. For this, the aggregate amount of paid up share capital and share premium of the start-up after the proposed issue of share should not exceed Rs 10 crore. Further, the investor should have returned income above Rs 50 lakh or net worth above Rs 2 crore for the financial year preceding the investment. Earlier, the minimum returned income requirement for investors was Rs 25 lakh.