Finance minister Nirmala Sitharaman on July 5, 2019 announced to ease the much-debated angel tax in a move that is likely to bring a huge relief to the startup community in India.
"To resolve the so-called ‘angel tax’ issue, the start-ups 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," Sitharaman said in her maiden budget speech.
"The issue of establishing 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 start-ups will not require any kind of scrutiny from the Income Tax Department," she added.
Angel Tax, which was introduced by the United Progressive Alliance (UPA) government in the Budget 2012, has been widely-criticised by startups in the country.
It went into a bad shape after some startups started receiving notices from the income tax department for non-payment of dues.
In order to ensure that it doesn't swell into a massive issue, right ahead of the elections, the government in December sprang into action and immediately widened the definition of a startup, making it smoother for investors to put in their money in these companies. The government also increased the age cap for startups from 7 to 10 years.
Under the IT Act, Section 56 (2) (viib) money invested by angels in a company is treated as income from other sources.
Startups welcomed the move.
"With startups being a major focus in Budget 2019, the government has showcased its seriousness towards the growth of startups in India. With the focus on resolving angel tax issue and not subjecting startups to any scrutiny in terms of valuation of share premium, the youth of India have seen a massive encouragement to become entrepreneurs of their own startups. We are definitely on the path to become a startup superpower really soon," said Avinash Saxena, cofounder, social entertainment platform Roposo.
According to Nitesh Mehta, partner, transaction tax and regulatory services BDO India, the much talked about angel tax for start-ups is proposed to go away, subject to provision of certain information and documents. And this would bring a sign of relief to start-ups.
"It is important to note that this benefit is likely to apply to start ups which are registered and recognised by DIPP," he added.
The country currently has over 16,500 startups recognised as on March 2019 by the government out of over 30,000 startups estimated in the country.
The angel tax was introduced to tackle the issue of money laundering through high premiums on shares.
As of April, around 342 startups had received an intimation regarding exemption from angel tax since February.
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