Working group to examine Angel Tax pain

A smaller working group will be set up in the next few days by the government to sort out the concerns related to the imposition of Angel Tax on start-up investors, and to come out with suggestions on resolving problem areas, the Department of Industrial Policy & Promotion (DIPP) has said.

“We had a round table on resolving issues related to the Angel Tax. There were a number of suggestions. We will form a smaller working group to come out with certain suggestions on resolving those issues in the next four-five days,” said Ramesh Abhishek, DIPP Secretary, talking to the media after a meeting with start-ups and investors on Monday.

On the hundreds of notices already issued to start-ups for tax violation, the Secretary said that the Central Bureau of Direct Taxes (CBDT) had assured that no coercive action will be taken.

Small start-ups and investors have raised concerns over the government’s condition — that an investor should have returned income of ₹50 lakh to be eligible for Angel Tax exemption, or the entity’s net worth or the invested amount should be more than ₹2 crore — as they fear that it would hit micro and small entrepreneurial ventures.

Some start-ups are also against the second condition, that their aggregate amount of paid-up share capital and share premium after issuance of shares should not exceed ₹10 crore.

‘Provide exemptions’

According to CBDT member Akhilesh Ranjan, the tax statutes are in place to check illegal activities, and the government did not want the start-ups to get caught in the cross-fire.

“We explained from the CBDT’s point of view the concerns we have, and why the statute is there. At the same time, we were very clear that we would like to carve out an exception for start-ups. We only have to define a set of parameters on what we are exempting from the provision. We will be working together,” Ranjan said.

Section 56(2)(viib) of the Income Tax Act, 1961, or the popularly called “Angel Tax” was inserted by the Finance Act, 2012 to tax any capital raised by a closely held company which is above its fair market value.

Last month, the government had eased the process for start-ups to seek income tax exemption on investments made by angel investors laying down the criteria for exemption.

Following consultations with start-ups and investors on their concerns related to the criteria for exemption, the government is now expected to come up with additional notifications to refine the existing statutes and give start-ups a carve-out.

“The roundtable was a great initiative by the DPIIT. The angel investors, start-ups, angel groups and industry bodies, along with DPIIT, were on an open discussion with the CBDT. The concrete outcome is that this will be resolved with a solution carved out by a working committee in the next seven days, and the IVCA will collate the recommendations and work towards carving out a solution for angels and start-ups from Section 56(2)(viib) and Section 68,” Rajat Tandon, President, Indian Private Equity and Venture Capital Association (IVCA), said.

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