Prelims Level
Mains Level
Prelims Syllabus : Economy Mains Syllabus : Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

In News

  • The government simplified the process for startups seeking exemption from angel tax notices by eliminating the need for a certification from an inter-ministerial body. The move seeks to ease concerns raised by startups about tax officials questioning the share premium received at the time of raising capital through the sale of new shares.

Explained

  • The move comes against the backdrop of various startup founders claiming that they have received notices under Section 56(2) (viib) of the Income Tax Act from the I-T department to pay taxes on angel funds raised by them.
  • Section 56(2) (viib) of the Income Tax Act provides that the amount raised in excess of a startup’s fair market value is taxed at 30 per cent as income of the firm from other sources. Entrepreneurs have raised concerns over these tax notices.
  • Normally, about 300-400 startups get angel funding every year.
  • According to the new notification issued by the government the start-ups whose aggregate amount of paid-up share capital and share premium after the proposed issue of share does not exceed 10 crore, are eligible for the exemption
  • These new norms are likely to encourage startups to get exemptions as many of them earlier refrained from seeking this benefit due to documentation processes
  • Also, the government launched the Startup India initiative in January 2016 to build a strong ecosystem for nurturing innovation and entrepreneurship.

What is angel tax?

  • The angel tax applies to unlisted companies that have raised capital through an issue of shares at a price deemed to be in excess of the fair market value of those shares. The excess capital over and above the fair market value is then treated as income and taxed accordingly. As this largely affects angel investments in start-ups, it has been dubbed
    angel tax.

Eligibility

  • Further, the investor’s net worth has to be at least ₹2 crore or the amount of investment made in the start-up, whichever is higher, as on the last date of the financial year preceding the year of investment. To claim the exemption, start-ups and investors have to make an application to the DIPP,
  • in the prescribed format, along with the necessary documents. Once approved, the Central Board of Direct Taxes (CBDT) is to then issue a certificate of exemption within 45 days of the application.
  • On the investor side, the notification says the angel investor should have filed I-T returns of at least ₹50 lakh for the year preceding the year in which the investment was made.
Share Socially