Budget 2019: Relief for startups as govt eases Angel Tax regulations

Finance Minister Nirmala Sitharaman, in her Budget speech, said that startups will not come under the scrutiny of angel tax if requisite declarations are filed.

After President Ram Nath Kovind spoke about the goal of establishing 50,000 startups by 2024, Finance Minister Nirmala Sitharaman laid out the plan for the same during her budget speech.

She tried to assuage the pain of Angel Tax that has been haunting the Indian startup ecosystem for some time now.

Sitharaman said, “Startups in India are taking firm roots and their continued growth needs to be encouraged. To resolve the so-called ‘Angel Tax’ issue, startups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums. The issue of establishing the identity of the investor and source of his funds will be resolved by putting in place a mechanism of e-verification. With this, funds raised by startups will not require any kind of scrutiny from the Income Tax Department”.

The Finance Minister added, “Special administrative arrangements shall be made by the Central Board of Direct Taxes (CBDT) for pending assessments of startups and redressal of their grievances. It will be ensured that no inquiry or verification in such cases can be carried out by the Assessing Officer without obtaining approval of his supervisory officer”.

Section 56 of the Income Tax Act, which is also called Angel Tax provision, has been a contentious issue for the startup ecosystem. The section was applied by the tax department to ask startups to pay tax on angel investment. Many startups who raised funds also received demand notices from the CBDT. While the clause does not apply to startups receiving funds from registered venture capital investors and AIF–I category, the industry wanted the scope of the exemption to be expanded. 

Almost heeding to their demand, Sitharaman said, “At present, startups are not required to justify fair market value of their shares issued to certain investors including Category-I Alternative Investment Funds (AIF). I propose to extend this benefit to Category-II Alternative Investment Funds also. Therefore, the valuation of shares issued to these funds shall be beyond the scope of income tax scrutiny”.

During the budget speech, she also proposed measures to carry forward and set off losses for startups and increase in-period of exemption of capital gains from the sale of residential house for investment in startups up to March 2021.

Earlier in the day, the FM also proposed to start a television programme within the DD bouquet of channels exclusively for startups. This shall serve as a platform for promoting start-ups, discussing issues affecting their growth, matchmaking with venture capitalists and for funding and tax planning. It shall be designed and executed by startups themselves.

(Edited by Saheli Sen Gupta)