India is a country of many great legends who were famous all over the world because of their works, sharp mind and high skill. However, our country is still on the developing track because of the lack of some solid support and ways to work in right direction. Youths in India are very talented, highly skilled and full of innovative ideas. The initiatives is necessity to lead India in right direction. The most important point is that it involves youths of the country as start-ups as they have fresh mind, innovative ideas, required strength, energy, skill, and new thinking to lead business. Developing Start-up is an timeless phenomenon. At the core of it lies one’s basic desire to create a product or service which serves a greater purpose, and make your own niche in the process. As start-ups turn out to be a major source of revenue and employment, governments from across the world have been going out of their way to facilitate the entrepreneurial dream. Even India has done its fair bit to support start up dreams by means of its flagship ‘Make in India’ programme and a plethora of other schemes like ‘Start up India’. But even with all these schemes and options, one thing that is still a potential cause of worry is the so-called angel tax.
♦ History of Angel Tax In India
The tax was introduced in the 2012 Union Budget by then finance minister Pranab Mukherjee to arrest and stop laundering of funds. It has come to be called angel tax since it largely impacts angel investors in start-ups.
♦ Law Governing Angel Tax In India
Section 56(2)(viib) of Income Tax Act, 1961 is the core section of Angel Taxation. Angel taxation is only an terminology given to tax levy under the abovementioned section.
♦ Point of Concern:.
♦ Illustrative Calculation of Angel Tax.
|Fair Market Value of Share as Per Angel Investors For Investment.||Rs. 500 / Per Share|
|Fair Value of Share Calculates as Per Rules and Methodology given by Income Tax Act 1961.||Rs. 300 / Per Share|
|Number of Share as mutually decided by Angel Investor and Start-up Company.||1000 Shares|
|Income Taxable In the Hands of Start-up Company under the head Income From Other Source.||1000(Rs.500 – Rs.300)= Rs. 2,00,000/-|
|Tax Payable by Start-up Company||Rs. 2,00,000 * 30.90%= Rs. 61,800/-|
♦ Exemption/Relief To Some Start-ups.
Major Relief has been granted to Start-ups by The Department for Promotion of Industry and Internal Trade in super session of all earlier notification by means of issuing New Notification dated 19 Feb 2019
Further, to be eligible for the exemption, there are restrictions on investments made by the start-ups which are as below-
As a part of compliance, the start-up is also required to file a declaration in the prescribed form stating that above conditions are fulfilled. The notification also provides that, in case the start-up which has claimed an exemption under section 56(2)(viib) of the Act, makes an investment in any of the above specified investments before the end of seven years (from the end of the latest financial year in which the shares are issued at premium), the exemption availed under the said section shall be revoked retrospectively.
As the investment in securities is prohibited, the start-up will not be eligible to invest in mutual funds as well and investments would be restricted to other modes like fixed deposits, government bonds etc. Further, it is pertinent to note that the criteria of an investor having a specified return on income and net worth is done away with as provided in the earlier notifications.
Overall, the notification provides some relief (which was overdue from a long time) in terms of enhancing the limits to qualify as a start-up, and provides an additional incentive in the form of increase in aggregate amount of share capital and share premium post issue of shares (INR 25 crores for residents and no limit for non-residents), the restrictions on investments to be made by start-ups are quite stringent and impose challenges on the start-ups and their operations.
♦ Pain Point of Start-ups.
The tax authorities have started issuing demand notices to startups to pay the angel tax by end-March. The latest notices specify the exact amount startups are required to pay along with the calculation of the taxes.The Central Board of Direct Taxes (CBDT) had issued a notice asking tax officers not to use “coercive measures” to recover the outstanding amount from the startups. The Department of Industrial Policy and Promotion (DIPP) is also looking into the angel tax issue and assured that the government would not harass the angel investors and start-ups (News).
I hope that the government may seek to resolve the issue in the months to come, but that too may not have a retrospective effect on the angel tax controversy.