In a big boost to start-ups, the government has abolished the so-called `angel tax’ for all classes of investors.
“To bolster the Indian start-up eco-system, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors,” Finance Minister Nirmala Sitharaman said in her Budget speech.
Angel tax (Section 56.2 VII B) is an income tax of 30.6 per cent levied when an unlisted company issues shares to an investor at a price which is more than its fair market value.
In the initial stage of being set up, when many start-ups depend heavily on foreign funds, the imposition of angel tax can affect flow of funds, according to the industry.
The Department for Promotion of Investment and Internal Trade (DPIIT) had proposed abolition of angel tax to the Finance Ministry in line with industry demands.
Although start-ups registered with DPIIT are exempt from angel tax, a large number of start-ups in the country are unregistered. There are only about 1,34,260 start-ups that are registered.
“Earlier, start-ups were allowed a tax exemption from angel tax subject to certain conditions such as the amount of share capital and securities premium post-fund raise not exceeding ₹25 crore, the end-use restrictions on funds raised by start-ups such as no investments in financial assets and a requirement to submit declaration in Form 2. The abolition of angel tax provisions will now enable start-ups to raise funds without any such conditions and compliance requirements,” according to Anish Shah, Partner, M&A Tax and Regulatory Services, BDO India.
Angel Tax was first introduced in 2012 to discourage the generation and use of unaccounted money through the subscription of shares at higher value than the fair market value.
However, start-ups had argued that their valuation was pegged by investors to their future potential and did not necessarily match their actual performance in the present.
The industry has argued that the government is wrong in citing the difference between valuations and actual performance as a sign of money laundering, adding that investors fund start-ups based on their future potential.