Despite no clarification given on demon of 'angel tax', that startups still haunts from, new regulations and contemplation are being revealed every passing day.

A day after Budget 2018 was presented, Department of Industrial Policy and Promotion (DIPP) announced that it is making an amendment where startups incorporated before 2016 that have got up to Rs 10 crore in angel funding won’t face the so-called angel tax.

Now, in a latest news coming from a source, government is considering a proposal to exempt investments from recognized angel investor groups in startups from the so-called angel tax.

The news report further stated that, as an additional step concerning angel investments, a committee has been set up under the Securities and Exchange Board of India (SEBI) to form a framework for regulating angel investments.

The 'demon' of so-called angel tax was introduced in Union Budget of 2012 under section 56 (2) (viib) of the Income Tax Act, 1961. This section says that any excess consideration received by a company will be treated as the income of the start-up if it issues shares to a resident at a price which exceeds the fair market value of the shares. The section does not apply if consideration is received from venture capital companies, venture capital funds or a certain class of persons notified by the government. Thus, a startup is required to pay an angel tax at the rate of whopping 30.9% on the capital raised in excess to its fair value.

Thereafter, in past few years, the finance minister has provided exemption from angel tax by excluding investments by non-residents, venture funds, angel funds, and the DIPP-registered startups. Astonishingly though, the startups and Angels of Indian origin are not excluded from taxation.

The latest move of government's new proposal may extend the exemption to angel investors of Indian origin as well.

Prominent angel groups such as Indian Angel Network, Venture Catalysts, AngelList and LetsVenture, among others, are currently presenting proposals to the SEBI panel on the outlines of the regulations regarding angel investments in the country.

To recall, in this year's union budget, it was announced that time for claiming a tax holiday/exemption by eligible startups has been extended till 1-April 2021.

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