A spurt in angel tax notices to startups by the tax department has again raised concerns in the startup community, and may signal that their actual financial performance may be lower than the projected while raising funds.
The commerce and industry ministry will take up the issue of angel tax notices being sent to startups with the finance ministry, Union Minister Suresh Prabhu said in a recent tweet.
The Minister was responding to a tweet by T.V. Mohandas Pai, Chairman of Manipal Global Education, who sought government intervention on the tax notices sent to startups. Media reports have said that over the last few weeks, several startups have received notices from the tax department asking them to pay taxes on their angel investments raised.
Several startups have also raised concerns on being sent notices as it would affect their cash flows.
A PTI report quoting an income tax official said, “Notices issued on angel tax to startups may be for those that are not recognised by the Department of Industrial Policy and Promotion (DIPP)”. In April, the government had given interim relief to startups, allowing them to avail tax concession if the total investment, including funding from angel investors, did not exceed Rs 10 crore, the PTI report said.
Under Section 56 (2) (viib) of the Income Tax (I-T) Act, if a privately-held company issues shares at an amount that is higher than the face value, or than the fair market value, the difference between the issue price and fair market price is taxed as income in the hands of the startup.
The current spurt in angel tax notices indicates that the issue price of shares by startups might have been inflated in the past based on optimistic projections. However, based on the actual performance over the last few years, the income tax department deemed several angel investments to be higher than the fair market value and has sought to tax the difference.
The IT Department compares the revenue projections that startups give to investors while raising funds with the actual performance, and the difference in share value is calculated to levy the angel tax.