Startups get relief on angel tax

The government has eased for startups the process to seek tax exemptions on angel investments.

New Delhi: The government on Wednesday 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.

Now, such applications for exemption, routed through the department of industrial policy and promotion (DIPP), will be processed by the Central Board of Direct Taxes within 45 days.

“No committee, no certificate of valuation needed. All previous and future investments are covered. Startups incorporated before April 2016 are also covered,” said a DIPP official on condition of anonymity.

The problem for startups stems from an anti-abuse provision introduced in the Income Tax Act in 2012 to curb the practice of politicians accepting bribes in the guise of share premium in unlisted companies set up by them. Section 56(2)(viib) of the Income Tax Act provides for taxation of the share premium that is above the fair valuation of shares as “other income”. As startups are valued on the basis of the business potential of their ideas, which could change with time, they find it hard to justify the share premium received.

Tax officials prefer to value these enterprises on the basis of their net asset value, but companies tend to be valued on the basis of their earnings potential.

Commerce minister Suresh Prabhu raised the matter with finance minister Arun Jaitley after startups complained that they had received notices from the income tax department.

However, some startups are not happy. “The solution prescribed by the government is impractical. Startups needed a big bang solution and DIPP-recognized startups could have been given a blanket exemption after submitting a few more documents,” a startup founder said on condition of anonymity.