Angel Tax to be withdrawn from startups and its investors, says Finance Minister

The decision by Finance Minister Nirmala Sitharaman is a big relief for the startup ecosystem in India and is likely to spur the seed stage investments.

The startup ecosystem in the country has much to rejoice as Union Finance Minister Nirmala Sitharaman on Friday has very categorically declared that the dreaded Angel Tax will be withdrawn for startups and the investors into such companies.

The Finance Minister, who announced a slew of measures to revive the economy, said that Section 56 (2) VIIB of the Income Tax under which the Angel Tax provision was applicable will no longer be used against the startups. The only condition being that these startups have to be registered with the Department for Promotion of Industry and Internal Trade (DPIIT).

Angel Tax has been the biggest bugbear for the Indian startup ecosystem as the fund raised by these companies came under the purview of taxation. This had created unnecessary stress for both the entrepreneurs and the angel investors.

The Finance Minister further said this decision was taken to mitigate the genuine difficulties of startups and their investors. Now, there will be dedicated cell under the Central Board of Direct Taxes to address the various problems of startups.

The Finance Minister during her Budget speech had said, “Startups in India are taking firm roots and their continued growth needs to be encouraged.” She also remarked that the funds raised by startups will not require any kind of scrutiny from the Income Tax Department.

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. 

The Finance Minister during the Budget speech had also reassured the startups that there will not be any undue harassment from the I-T department as any inquiry or verification by the assessing officer will be carried out only after obtaining approval from the supervisory officer.