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Start-ups looking to find their feet have finally got relief on the angel tax front. The Income Tax Department has completed the circle in the Government’s efforts to keep small start-ups that have the approval of the Inter-Ministerial Board of Certification from the angel tax net.
What is angel tax
When equity investments are made in closely-held private companies at a premium to the fair price, the income tax authorities were bringing to tax the difference as “income from other sources” at a hefty 30.9 per cent. This tax — popularly known as angel tax — had upset start-ups and compelled them to lobby hard with the Government for an exemption from this impost.
CBDT move
The Central Board of Direct Taxes (CBDT) on May 24 came up with a new executive order in supersession of its June 14 , 2016 notification. The latest notification said angel tax will not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the consideration has been received for issue of shares from an investor in accordance with approval granted by the Inter-Ministerial Board of Certification.
The CBDT also said the latest notification is deemed to have come into force from April 11, 2018 — the date of DIPP notification that spelt out the Angel Tax exemption criteria.
The qualifying criteria stipulated that the aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of shares should not exceed ₹10 crore. Also, the start-up should obtain a report from a merchant banker specifying the fair market value of shares under the income tax rules.
Experts’ take
Aseem Chawla, Partner, ASC Legal, a law firm, said the CBDT notification is not only a welcome respite but also a timely initiative of the CBDT in ensuring that the tax treatment is well clarified.
“Such instance of co-ordinated approach of various arms of government in a harmonious manner would inspire and add to the confidence of the start-up community and the industry as a whole,” he said.
Amit Maheshwari, Partner, Ashok Maheshwary & Associates LLP, a CA firm, said the CBDT notification has aligned section 56(2)(viib) of the Income Tax law with the recent DIPP notification for start-ups. “However, restricting the capital raised to ₹10 crore will play a spoiler for start-ups raising funds from family offices or unregistered funds,” he said.
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