The Income Tax Department is expected to come out with a detailed circular addressing various concerns related to angel tax on start-ups in the next two-to-three days, a senior Finance Ministry official said here on Thursday. This is a follow up of the Budget proposal announced on February 01.

The official has also indicated that a two-rate GST structure for online gaming will be explored. However, the final decision will be taken up in the next meeting of GST Council, the official has clarified.

Angel Tax

“Rules are likely to be notified before April 30. Our effort is to address all the concerns,” the official said.

Earlier, in a conversation during the Breakfast with businessline event in Bengaluru, Minister of State for Electronics, and Information Technology Rajeev Chandrasekhar had said: “We certainly think that the angel tax is an aberration and we need more reforms, and that is certainly something that the Finance Minister is aware of.”

Angel tax (income tax at the rate of 30.6 per cent) is levied when an unlisted company issues shares to an investor at a price that is more than its fair market value. Earlier, it was imposed only on investments made by a resident investor. But Budget 2023-24 proposed to extend angel tax even to non-resident investors from April 1, 2024.

According to the official, it has also been clarified that exemption from new provisions will be available for start-ups recognised by the Department for Promotion of Investment and Internal Trade (DPIIT). As on date, more than 98,000 start-ups are recognised by DPIIT and eligible for various exemptions.

Although the start-ups registered with DPIIT are likely to be exempted, the industry is of the view that the decision will affect start-ups as as many of them depend on foreign funds, especially during the initial stage.

Also read: Angel tax is draconian and unfair on start-ups 

The industry’s chief concern is that calculation of fair market value of a start-up could have subjective aspects and involve issues such as determination of future performance. One suggestion from the industry is to consider the understanding reached between the company and the investor as an important parameter. 

GST on Online Gaming

The official has also indicated that there could be different rates for ‘game of skill’ and ‘game of chance’ in the online gaming.

“The proposal is being discussed and a final decision can be taken only by the GST Council,” he said. Date of the next council meeting is yet to be decided.

Also read: Tax sleuths knock on the doors of more online gaming firms

“All online games are not games of chance and are not in the nature of betting or gambling. The Finance Ministry will be presenting its view before the council,” the official told reporters here. This could mean 18 per cent for game of skill and 28 per cent for game of chance.

At present, online gaming companies charge GST at the rate of 18 per cent on skill-based games. However, tax officials are of the view that these are chance-based games and, thus, should attract GST at the rate of 28 per cent. This difference of opinion led to tax disputes and litigations litigations and one such major litigation involving ₹21,000-crore tax demand is pending before the Karnataka High Court.