According to YourStory sources, the government is likely to issue a circular this week, which will address most of the concerns that startups have with regard to the Angel Tax.Vishal Krishna
Startups may finally get a breather from the much-hated Angel Tax this week. The DIPP, now renamed as the Department for Promotion of Industry and Internal Trade (DPIIT) is likely to issue a circular this week that provides a blanket exemption to startups that are up to 10 years old from Angel Tax notices.
Sources close to the matter confirmed to YourStory that the DPIIT has taken into account the representations made by angel and other investors, fund managers, entrepreneurs and the Central Board of Direct Taxes, and decided to ease the existing provisions in a big way.
According to the source, who attended the meeting held by the DIPP with ecosystem stakeholders on February 4, here are some of the broad measures that one can expect in a circular likely to be issued by the DPIIT and CBDT.
From an investability perspective too, the DPIIT is reportedly making startups an attractive proposition. Listed, actively traded companies with a turnover of Rs 100 crore (or a net worth over Rs 100 crore on a consolidated basis) can invest in startups, and this investment would be exempt from taxes just the way a SEBI-registered VC fund is, under Section 56 2(viib). This expands the pool of potential investors, and also makes it more attractive corporate India to invest in startups and open up a new line of funding for the country’s startup ecosystem.
At the same time, the DIPP is also changing the definition of accredited investor - angel funds under SEBI AIF, Rs 2 crore above should be the net worth, these angels will be exempt from section 56 2(viib).
The highly placed source also told YourStory that once this circular is out, startups who have received notices can cite the circular, sign the self-declaration and submit it to the appellate authority, taking recourse under new circular. That way, no tax authority can harass the startup under this recourse.
That leaves Section 68, which puts the onus on a startup to provide investor information such as bank statements, financial statements, and tax returns. The DPIIT is believed to be considering a way out of this which would remove the burden of proof from entrepreneurs and have the tax authorities follow up with the investors in question.
Angel Tax took shape in 2012 when the Manmohan Singh-led UPA government went after shell companies of political money, all of which were launched to launder money. However, the provisions have also been used to ask startups to pay taxes on their Share Premium under Section 56 2(viib) and explain cash credits under Section 68 of the Income Tax Act of 1961.
Nicknamed Angel Tax, it became what many described as a “lightning rod” to curtail entrepreneurship.
According to a survey Local Circles and the Indian Venture Capital Association, close to 2,000 startups have received Angel Tax notices from the Income-Tax Department over the past three years. Following intense lobbying from the startup ecosystem, the Government of India is finally looking at a near-blanket exemption to the Angel Tax. We look forward to measures that will protect the fledgling startup ecosystem and innovation in the country.