Abolishment of 'Angel Tax' and Other Supporting Announcements in Budget 2024–25

In a significant move to bolster the Indian startup ecosystem, the Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman, proposed the abolition of "angel tax" for all classes of investors during the presentation of the Union Budget 2024-25 in Parliament. This decision aims to boost the entrepreneurial spirit, support innovation, and encourage investment in startups.

Additionally, the corporate tax rate for foreign companies has been reduced from 40% to 35% to attract foreign capital for India's development needs. The government also plans to simplify rules and regulations for foreign direct investment and overseas investments, further promoting economic growth and innovation.

“Our government will seek the required legislative approval for providing an efficient and flexible mode for financing leasing of aircrafts and ships, and pooled funds of private equity through a ‘variable company structure’,” added Smt. Sitharaman.

To facilitate foreign direct investments, nudge prioritization, and promote opportunities for using Indian Rupee as a currency for overseas investments, the Finance Minister announced that the rules and regulations for Foreign Direct Investment and Overseas Investments will be simplified.

In addition to abolishing the "angel tax," the Union Budget 2024-25 introduced several measures to support entrepreneurship and innovation:

1. Startup India Seed Fund: The government has proposed a ₹1,000 crore ($134 million) fund to provide early-stage funding to startups. This fund aims to boost innovation and encourage new ventures.

2. Relaxation of FDI Norms: To attract foreign investment, the budget proposes simplification of rules and regulations related to foreign direct investment (FDI) and overseas investments. This move is expected to facilitate capital inflow into Indian startups.

3. Corporate Tax Reduction for Foreign Companies: The corporate tax rate for foreign companies has been reduced from 40% to 35%. This reduction aims to attract foreign capital and promote economic growth.

4. Incentives for Electric Vehicles (EVs): The budget provides tax incentives for the manufacturing of EVs and their components. This measure encourages clean energy startups and promotes sustainable mobility solutions.

5. Research and Development (R&D) Incentives: The government plans to incentivize R&D activities by providing tax benefits to companies engaged in research and innovation. This will support technology-driven startups.

6. TDS on e-commerce operators from 1% to 0.1% : In the Union Budget 2024-25, the government has proposed a reduction in the Tax Deducted at Source (TDS) rate for e-commerce operators. The TDS rate, which was previously 1%, has been lowered to 0.1%, thereby improving cash flows and unblocking working capital for sellers. This move aims to ease compliance for e-commerce platforms and encourage digital transactions.

7. E-Commerce Export Hubs: The formation of E-Commerce Export Hubs is another transformative step and will enable MSMEs and sellers to access international markets. These hubs will serve as bonded zones, facilitating both exports and imports of e-commerce cargo. They aim to address the challenge of re-imports, which account for about 25% of e-commerce goods. Setting up E-Commerce Export Hubs will enhance the accessibility and efficiency of e-commerce exports and empower India’s many local sellers.

Overall, this year's budget offered measures collectively aim to create a conducive environment for startups, foster innovation, and drive economic growth.

DPIIT Requests FinMin to Remove Angel Tax on Startups

The Department for Promotion of Industry and Internal Trade (DPIIT) has recommended the removal of the Angel Tax for startups. This tax, originally introduced in 2012 under Section 56 (2) (viib) of the Income Tax Act, aims to prevent abuse such as money laundering and round-tripping.

However, it has been a long-standing concern for startups and investors. When a closely held company (like a startup) issues shares at a valuation higher than the fair market value, tax authorities treat the excess amount received as income from other sources and levy a tax of about 30%. Investors argue that they invest at higher valuations considering a startup's future potential, and the tax notices hinder their "ease of doing business."

Venture capital investors also believe that repealing the Angel Tax will encourage Indian startups to relocate their domicile back to India and foster innovation in the world's third-largest startup economy. Let's hope for positive developments.

DPIIT's suggestion also comes after the Confederation of Indian Industry (CII) in its budget recommendations called for the removal of angel tax saying it “will greatly aid in capital formation”.

As of now, there isn't a specific timeline for the decision on repealing the Angel Tax. The recommendation to remove it has been made by the DPIIT, but the final decision rests with the Union Finance Ministry. We'll have to keep an eye out for update.

The potential benefits of repealing the Angel Tax for startups are manifold. Removal of the tax would create a more favorable environment for angel investors, encouraging them to invest in early-stage startups without the fear of tax scrutiny. As startups often rely on angel funding during their initial stages. Eliminating the tax burden would enhance their access to capital, fostering innovation and growth. A tax-free investment climate would attract foreign investors, leading to increased foreign direct investment (FDI) in the Indian startup ecosystem.

Moreover, vibrant startups contribute significantly to job creation. By easing investment, the country can witness more startups to scale up and hire talent.

In addition to these benefits, a tax-free regime would make Indian startups more competitive globally, encouraging them to stay and operate within the country. Simplifying tax regulations would improve the ease of doing business for startups, reducing administrative burdensm

These benefits depend on effective implementation and monitoring to prevent misuse. Let's hope for positive policy changes.

Angel Tax: New Tax Exemption Rule To End Startup Funding Crunch

Days after the tax department proposed to exempt SEBI-registered FPIs, pension funds and SWFs from the purview of angel tax, the government has notified 21 countries from where non-resident investment in unlisted Indian startups will not attract angel tax.

Seen as breather for startups struggling with funding shortage, the Angel Tax will not be imposed on foreign investment made in unlisted Indian startup firms from 21 countries including the US, UK and France.

However, this list does not include investments coming from countries like Singapore, Mauritius and UAE though highest FDI in India comes from these countries. The government stated in the FY 2023-24 budget that investments in all unlisted companies except for startup companies recognized by the Department of Industry Promotion and Internal Trade (DPIIT) an angel tax will be levied. Since then, the startup and venture capital industry was seeking tax exemption for investment coming from certain countries.

The Central Direct Tax Board (CBDT) issued a notification on Wednesday stating that investors of certain categories would not fall within the scope of the Angel Tax provision. These categories include first class foreign portfolio investors registered with SEBI ( SEBI), endowment funds, pension funds and investments with participation from residents of 21 countriesm. This notification has become effective from April 1, 2023. Countries included in the tax exemption include — Canada, Austria, Czech Republic, Belgium, Denmark, Finland, Israel, Italy, Iceland, Japan, in addition to the US, UK, Australia, Germany and Spain, Korea, Russia, Norway, New Zealand and Sweden.

On May 24, CBDT notified the classes of investors who would not come under the Angel Tax provision. The entities that are excluded are –

• Those registered with SEBI as Category-I FPI, Endowment Funds, Pension Funds and broad-based pooled investment vehicles, which are residents of 21 specified nations as per the notification.
• Banks or regulated entities involved in insurance business, and entities registered with Sebi as Category I foreign portfolio investors (FPIs), endowment fund and pension fund are also in the proposed exempted list.

The so called angel tax which is applicable to startups is essentially a tax levied on the capital raised by a company and was introduced originally in the 2012 Budget. Until the 2023 Budget, the tax was applicable only to domestic individual investors. However, in the 2023 Budget, both foreign investors and NRI investors were also brought under the ambit of the angel tax.

No Effect on Startups from Proposed Changes in Income Tax Laws – Minister

Union Minister Piyush Goyal said that the government is continuously supporting the startup environment. The country has grown significantly in this area since the inception of the Startup India initiative.

Government-recognized startups will not be affected by proposed changes in income tax laws regarding the issuance of shares to foreign entities.

Anurag Jain, secretary of the Department for Promotion of Industry and Internal Trade (DPIIT), said companies or startups that are not recognized by DPIIT. They will be covered under the proposed amendments to Section 56 ( 2) of the Income Tax Act.

In section 56 (2) the amount exceeding its fair market value of a startup shall be treated as income from other sources. It will be taxed at 30 per cent. It has been dubbed Angel Tax due to its impact on Angel Investors' investment in startup enterprises. Jain said that those who are not registered with the startup department will come under the revised provisions of the section.

The minister told reporters, "There is no angel tax on startups, lets be clear about that. Sec 56 (ii) used to have two proviso - one was preferential treatment of foreign players. So that preferential treatment has been done away with...Anybody which is a recognised startup by the DPIIT will not attract angel tax if investment is made into that, be it foreign or domestic."

Union Minister Piyush Goyal further said that the government is continuously supporting the startup environment. The country has grown significantly in this area since the inception of the Startup India initiative. I believe that this budget will certainly provide good support and help to the startup environment so that it can flourish in the coming years.

Goyal said that the budget also focused on promoting startups in the agricultural sector and creating agro-entrepreneurs. It will also promote better ideas for cold storage, food processing and value addition in agriculture.

DPIIT-Registered Startups Exempt from Angel Tax: FM

New Delhi, Aug 23 (PTI) The government on Friday exempted all startups that are registered with the DPIIT from the so-called 'angel tax', which will help resolve difficulties faced by the fledgling businesses and their investors.

"To mitigate genuine difficulties of startups and their investors, it has been decided that Section 56(2)(viib) of the IT Act shall not be applicable to a startup registered under DPIIT," Finance Minister Nirmala Sitharaman told reporters here.

She added that while the said section will continue to be part of the Income Tax Act, it will not be applicable to the startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT).

Besides, a dedicated cell, headed by a member of the Central Board for Direct Taxes (CBDT), will be set up to address concerns faced by startups.

"After this, if there is a difficulty, it has been decided to set up a dedicated cell under a member of the CBDT. Any startup that has an issue can approach the cell for quick resolution of the problems," she said.

Multiple startup founders had claimed that they have received notices under Section 56(2) (viib) of the Income Tax Act to pay taxes on angel funds raised by them.

Welcoming the decision, Indian Angel Network Fund Founding Partner Padmaja Ruparel said she was optimistic that these steps "will empower the Indian start-up ecosystem by pruning the lingering problems with the angel tax".

S R Patnaik, Partner and Head (Taxation) at Cyril Amarchand Mangaldas, said the move to exempt registered startups will "absolve" them from being harassed by the tax authorities. "The FM has also assured the industry that tax authorities will not 'overreach'. This is a very welcome statement and should provide a lot of comfort to the industry," Patnaik added.

An angel investor puts funds in a startup when it is setting up its business. Normally, about 300-400 startups receive angel funding in a year. Their investment in a unit ranges between Rs 15 lakh to Rs 4 crore.

Section 56(2)(viib) of the I-T Act provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent.

Touted as an anti-abuse measure, this section was introduced in 2012. It is dubbed as 'angel tax' due to its impact on investments made by angel investors in startup ventures.

Vikas Vasal, Partner and National Leader (Tax) at Grant Thornton India LLP, pointed out that the government has been proactive in addressing the concerns of startups and has taken number of measures in the recent past in this direction.

"Removal of angel tax will go a long way in building trust and confidence in the startups and the investors, and shows government's resolve towards ease of doing business in India and encourage entrepreneurship," he said.

HomeLane.com founder and CEO Srikanth Iyer said the waiver of 'angel tax' and simplification of flow of risk capital to young companies will allow early-stage ventures to raise seed capital. PTI DP SR

CBDT's Procedure for Pending Angel Tax Assessment Cases to Safeguard Start-ups: Experts

The government's recent decision to give relief to start-ups on assessment of angel tax notices would provide a safeguard to them and promote their growth, according to experts.

Seeking to calm the nerves of start-ups worried about angel tax, the government last week assured that explanation given by them to a tax notice in a limited scrutiny case would be summarily accepted without any questions asked by the taxman.

The Central Board for Direct Taxes' (CBDT) circular with this effect "brings in more safeguard by requiring assessing officers to procure his or her supervisor's consent before starting on any inquiry under the angel tax provision against a start-up company which has not got DPIIT approval," S. Vasudevan, Partner, Lakshmikumaran & Sridharan said.

However, he added that the circular does not specify any minimum rank of the consenting superior officer.

"Also, lack of guidelines as to how the assessing officer or his supervisory officer selects cases for scrutiny may continue to haunt the start-ups," he added.

Amit Maheshwari, Partner, Ashok Maheshwary & Associates LLP said that CBDT's clarification will help start-ups which are facing questioning in their assessments and will also give a clear direction to assessing officers on what to do in such cases.

Naveen Wadhwa, DGM, Taxmann said that the board has also issued a circular to provide relief to start-ups which are undergoing assessment proceedings with respect to angel tax issue.

"The CBDT has directed the assessing officers to accept the contention of start-ups with regards to angel tax issue if start-up is an eligible start-up in view of latest notification of DPIIT," he said.

Nangia Advisors (Andersen Global) Managing Partner Rakesh Nangia said, "Directions of the CBDT that the tax officer will have to summarily accept the contentions of the start-up on valuation of its shares shall provide the relief intended to be provided to the start-ups." PTI RR

Angel Tax Assessment for Startups Gets SIMPLIFIED

Giving a relief to startups, the finance ministry has simplified the angel-tax assessment process under which any action would be taken against such entities only after approval of a supervisory officer.

The Central Board of Direct Taxes (CBDT), in a circular, said that no verification will be done by an assessing officer if a startup has been recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) and the case is selected under limited scrutiny.

In cases where scrutiny assessments of startup entities are pending, the CBDT has decided that the contention of the assessee will be summarily accepted whose cases are under 'limited scrutiny' for those entities recognised by DPIIT.

"In case of startup companies recognised by DPIIT which have filed Form No. 2 and whose cases have been selected under scrutiny to examine multiple issues including the issue of section 56(2)(viib), this issue will not be pursued during the assessment proceedings and inquiry on other issues will be carried out by the Assessing Officer only after obtaining approval of the supervisory authority," an official statement said.

Form 2 deals with the exemption of startups from income tax subject to certain criteria.

If a startup is not recognised by the DPIIT, then too the inquiry would be carried out after the approval of a supervisory officer.

The circular followed the announcement made by Finance Minister Nirmala Sitharaman in Budget.

She proposed a host of incentives, including a special arrangement for resolution of pending assessments of income tax cases, with a view to encouraging startups.

"To resolve the so-called 'angel tax' issue, the startups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums," she had said.

The issue of establishing the identity of the investor and source of his/her funds will be resolved by putting in place a mechanism of e-verification. PTI DP

Relief for Startups: CBDT Lays out Procedure for Pending Angel Tax Assessment Cases

Seeking to calm the nerves of startups worried over angel tax, the government has assured that explanation given by them to a tax notice in a limited scrutiny case would be summarily accepted without any questions asked by the taxman.

This is part of the procedure being laid out by the Central Board of Direct Taxes (CBDT) to deal with pending angel tax assessments of startups, a move aimed at easing tax compliance for such ventures.

For cases that land in limited scrutiny, "no verification of such issues will be done by the assessing officers during the proceedings...and the contention of such recognised start-up companies the issue will be summarily accepted," the CBDT said in a circular, dated August 7.

Further, in case of limited scrutiny with multiple issues or a complete scrutiny, while an assessing officer may not go into the assessment proceedings with regard to the angel tax issue, the authority would be empowered to verify linked matters with the approval of his/her supervisory officer.

If a startup is not recognised by the DPIIT, then too the inquiry would be carried out after the approval of a supervisory officer.

The income tax department carries out two types of scrutiny procedures -- limited and complete -- which entail submission of additional documents and financial reports.

The move followed after certain startups complained about facing harassment and the taxman breathing down their neck on the angel tax issue.

The circular followed the announcement made by Finance Minister Nirmala Sitharaman in Budget. She proposed a host of incentives, including a special arrangement for resolution of pending assessments of income tax cases, with a view to encouraging startups.

"To resolve the so-called 'angel tax' issue, the startups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums," she had said.

The issue of establishing the identity of the investor and source of his/her funds will be resolved by putting in place a mechanism of e-verification.

Commenting on the issue, Amit Maheshwari, Partner, Ashok Maheshwary & Associates LLP said that CBDT has come out with a framework to tackle pending tax assessments.

This clarification will help startups which are facing questioning in their assessments and will also give a clear direction to assessing officers on what to do in such cases, he said.

"Contention of startups having DPIIT recognition will be accepted on section 56(2)(viib) of Income tax act and therefore, there would not be any tax adjustment additions on this account," he said.

He added that startups which do not have DPIIT recognition will still have to substantiate the valuations of the assessing officer, if they question them.

"However, as a safeguard this enquiry/verification will be after obtaining prior approval from the supervisory officer," he added.

Nangia Advisors (Andersen Global) Managing Partner Rakesh Nangia said, "Directions of the CBDT that the tax officer will have to summarily accept the contentions of the startup on valuation of its shares shall provide the relief intended to be provided to the startups."

While the recognised startups stand relieved, the ones that are yet to receive a nod from the DPIIT may still have to face the inquiry from tax officers and the procedure to be followed by the tax officers in such cases would be crucial to note, Nangia added.

An angel investor puts funds in a startup when it is setting up its business. Normally, about 300-400 startups receive angel funding in a year. Their investment in a unit ranges between Rs 15 lakh and Rs 4 crore.

After claims being made by several startups that they were receiving tax notices under section 56(2)(viib) of the Income Tax Act, 1961 to pay taxes on angel funds received by them, the DPIIT in consultations with CBDT resolved the issue.

Section 56(2)(viib) of the I-T Act provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent.

Touted as an anti-abuse measure, this section was introduced in 2012. It is dubbed as angel tax due to its impact on investments made by angel investors in startup ventures.

More than 540 startups have received exemption from angel tax so far.

672 Startups given 'Angel Tax' Exemption by CBDT, Says DPIIT Secretary

672 startups have been given exemption with respect to investments under section 56(2)(viib) of the Income-tax act 1961, or commonly known as angel tax, by the Central Board of Direct Taxes (CBDT) so far.

Secretary, DPIIT, Mr. @rabhishek1982 also said that simplifying regulations for startups is the key challenge and the Govt. is working on it. He stressed on the fact that 672 Startups have been given a formal exemption letter by CBDT for the first time. pic.twitter.com/rabkn7j8Jg

— DPIIT India (@DIPPGOI) June 20, 2019

Till the end of last month, 541 startups were granted exemption, said an another tweet by Ramesh Abhishek last month.

Introduced in finance budget of 2012-13, the controversial angel tax was established to curb money laundering via small startups, that have received equity infusion in excess of the fair valuation, with the premium being paid by investors as their income that have capital in exchange of equity shares at a price over and above the fair valuation of the shares sold even as the premium has to be being paid by investors considered as income and hence has been called as angel tax as the amount taxed is usually on angel investment in startups.

DPIIT is working on a definition of 'accredited investors', who could be provided tax incentives for investments in startups. The department has prepared a draft definition of these accredited investors, which can include trusts, individuals, family member of a startup and unlisted companies and these defined investors may get exemption from angel tax under Section 56(2)(viib) of Income Tax Act, 1961, beyond the Rs 25 crore limit.

In addition, as part of 'Startup India Vision 2024', DPIIT has also proposed relaxation in the income tax laws, for startup entrepreneurs or founders, pertaining sale of residential properties and carrying forward of losses, wherein capital gain on transfer of residential property not to be charged in certain cases.

Govt Working on Defining 'Accredited Investors', Who'll Get Tax Incentives for Investing in Startups

The Department for Promotion of Industry and Internal Trade (DPIIT) is working on a definition of 'accredited investors', who could be provided tax incentives for investments in startups.

DPITT (earlier known as DIPP), which works under the commerce and industry ministry, has already prepared a draft definition and is now seeking views of stakeholders.

These accredited investors, which can include trusts, individuals, family member of a startup and unlisted companies, may get exemption from angel tax under Section 56(2)(viib) of Income Tax Act, 1961, beyond the Rs 25 crore limit, said the officials of DPITT.

According to Wikipedia, an accredited or sophisticated investor is an investor with a special status under financial regulation laws. The definition of an accredited investor, and the consequences of being classified as one, vary between countries. Generally, accredited investors include high-net-worth individuals (HNIs), banks, financial institutions and other large corporations, who have access to complex and higher-risk investments such as venture capital, hedge funds and angel investments.

At present, startups in India gets full angel tax concession on investments up to Rs 25 crore and investors with a specified limit of turnover and net worth -- listed companies, non-residents and alternate investments funds category I like venture capital funds -- also get an exemption from angel tax on investment beyond Rs 25 crore.

Introduced in 2012 as an anti-abuse measure, Section 56(2)(viib) of Income Tax Act (commonly known as Angel Tax) provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30%.

According to media reports, government is seeking views of stakeholders on the definition of accredited investors. They will be exempted from section 56 (2) (viib). We will define it as a separate category like listed companies

Good News - Angel Investors in Startups Get Income Tax Exemption Up To 100%

Indian tax department yesterday exempted angel investors from income tax on their investments in startups with effect from April 11. The tax concessions are subject to certain conditions laid down by the Department of Industrial Policy and Promotion (DIPP) last month, which said that the share capital and share premium of the startup should not exceed Rs 10 crore after such investments.

Also the angel investor who plans to subscribe the shares in the start-up will have to fulfill prescribed criteria and the start-up will have to procure a report from a merchant banker, specifying the fair market value of the shares in accordance with income tax rules.

The Income Tax Department, on May 24, issued a notification, superseding its June 2016 notification. “…The Central Government, hereby notifies that the provisions of clause (viib) of sub-section (2) of section 56 of the said Act shall 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 the approval granted by the Inter-Ministerial Board of Certification,” the Central Board of Direct Taxes (CBDT) said in the May 24 notification.

This notification comes into effect retrospectively from April 11, 2018, it said.

The decision to give investors in startups exemption from income tax was aimed at addressing a key issue faced by angel investors who put money during early growth stage, and would also provide level-playing field for all investors. The Commerce and Industry Ministry had on April 11 said that a start-up can seek tax concession under the section 56 of I-T act. The section 56 provides for taxation of funds received by an entity.

The CBDT has also amended Rule 11 UA (2)(b) of I-T Act, thereby making merchant banker valuation compulsory for the purpose of determining fair market value of unquoted equity shares, and omitted the word 'accountant'.

The notification further said that an angel investor with a minimum net worth of Rs 2 crore or an average returned income of over Rs 25 lakh in the preceding three financial years would be eligible for 100 percent tax exemption on investments made into start-ups above fair market value.

The notification is a welcome move in diminishing the fears of start-ups in relation to angel tax and providing the much-needed clarity with respect to non-applicability of angel tax.

Another key takeaway from the notification, is withdrawal of power from chartered accountants to issue valuation reports for purposes of angel tax. This is perhaps designed to bring in more sanctity to issuance of valuation report.

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.

Startups and investors were expecting that the government will resolve the issue of angel tax in the this year budget of 2018 however the issue was left out completely.

Thereafter, a new clarification by Finance Secretary Hasmukh Adhia stated that genuine cases of startup valuation as assessed by DIPP will be exempt from paying taxes on angel investments received. However, this will also be applicable only for startups founded before 2016.

[Top Image - Blog.iPleaders.in]

Good News - Angel Investors in Startups Get Income Tax Exemption Up To 100%

Indian tax department yesterday exempted angel investors from income tax on their investments in startups with effect from April 11. The tax concessions are subject to certain conditions laid down by the Department of Industrial Policy and Promotion (DIPP) last month, which said that the share capital and share premium of the startup should not exceed Rs 10 crore after such investments.

Also the angel investor who plans to subscribe the shares in the start-up will have to fulfill prescribed criteria and the start-up will have to procure a report from a merchant banker, specifying the fair market value of the shares in accordance with income tax rules.

The Income Tax Department, on May 24, issued a notification, superseding its June 2016 notification. “…The Central Government, hereby notifies that the provisions of clause (viib) of sub-section (2) of section 56 of the said Act shall 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 the approval granted by the Inter-Ministerial Board of Certification,” the Central Board of Direct Taxes (CBDT) said in the May 24 notification.

This notification comes into effect retrospectively from April 11, 2018, it said.

The decision to give investors in startups exemption from income tax was aimed at addressing a key issue faced by angel investors who put money during early growth stage, and would also provide level-playing field for all investors. The Commerce and Industry Ministry had on April 11 said that a start-up can seek tax concession under the section 56 of I-T act. The section 56 provides for taxation of funds received by an entity.

The CBDT has also amended Rule 11 UA (2)(b) of I-T Act, thereby making merchant banker valuation compulsory for the purpose of determining fair market value of unquoted equity shares, and omitted the word 'accountant'.

The notification further said that an angel investor with a minimum net worth of Rs 2 crore or an average returned income of over Rs 25 lakh in the preceding three financial years would be eligible for 100 percent tax exemption on investments made into start-ups above fair market value.

The notification is a welcome move in diminishing the fears of start-ups in relation to angel tax and providing the much-needed clarity with respect to non-applicability of angel tax.

Another key takeaway from the notification, is withdrawal of power from chartered accountants to issue valuation reports for purposes of angel tax. This is perhaps designed to bring in more sanctity to issuance of valuation report.

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.

Startups and investors were expecting that the government will resolve the issue of angel tax in the this year budget of 2018 however the issue was left out completely.

Thereafter, a new clarification by Finance Secretary Hasmukh Adhia stated that genuine cases of startup valuation as assessed by DIPP will be exempt from paying taxes on angel investments received. However, this will also be applicable only for startups founded before 2016.

[Top Image - Blog.iPleaders.in]

NASSCOM Once Again Worried Over Fall in Startup Funding

The National Association of Software and Services Companies (NASSCOM) has once again expressed concern over the falling fund flows into startups and urged to energize the Indian Startup ecosystem.

In November 2017, NASSCOM had shared its concern over the taxation issues ("Angel Tax") in the startup scene, which led to a steep 50 per cent fall in angel investments and a significant decline in series A funding.

To recall, in July'17 report of Tracxn, a startup analytics firm, the number of angel and seed investments made in the first half of 2017 (January to June) is down to 260, indicating a drastic drop from 419 in the first half of 2016. Whereas, Seed funding has seen a steep decline from 278 to 152.

Raising his concern over falling funding issue, NASSCOM President R Chandrashekhar said, “While angel investments are the critical first piece that gets a startup going, series A fund is the one where the angel investors really make their exits and make money. That’s what incentivises them to continue their investments.”

“We had pointed that out and felt that corrective measures are needed. However, we did not find that being addressed in the Budget,” he added.

The above development was first reported in India.com

Earlier in May 2017, News Corp, had released Startup Deal Report Q1 CY2017. According to this report, investors prefers late stage funding. The report also stated that angel and seed investments fell both in volume and value terms with deal volumes reduced to half with 120 deals in Q1 CY2017 in comparison to 245 deals in the same period last year. Whereas Series A funding declined 65% in deal value on a Y-o-Y basis and Series B funding value improved 22% in the FY Q1 compared to the same period last year, despite deal numbers being lower by 16%.

Moreover, it can also be noted that the India's income tax department had demanded Rs 110 crore income tax from the e-commerce major Flipkart, which the company had challenged in the appellate tribunal and has reportedly lost the appeal.

The department’s claim was based on its findings that the company was showing losses by offering huge marketing discounts. According to them, the ecommerce major had a profit of Rs 408 crore in FY16 and thus a tax liability of Rs 110 crore, while the company had claimed a net loss of Rs 796 crore for the year.

Talking about demon of 'Angel Tax', startup ecosystem got disheartened when they found no mention of this in this year's Union Budget.

However, 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. Later, it was reported that government is considering a proposal to exempt investments from recognized angel investor groups in startups from angel tax.

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

NASSCOM Once Again Worried Over Fall in Startup Funding

The National Association of Software and Services Companies (NASSCOM) has once again expressed concern over the falling fund flows into startups and urged to energize the Indian Startup ecosystem.

In November 2017, NASSCOM had shared its concern over the taxation issues ("Angel Tax") in the startup scene, which led to a steep 50 per cent fall in angel investments and a significant decline in series A funding.

To recall, in July'17 report of Tracxn, a startup analytics firm, the number of angel and seed investments made in the first half of 2017 (January to June) is down to 260, indicating a drastic drop from 419 in the first half of 2016. Whereas, Seed funding has seen a steep decline from 278 to 152.

Raising his concern over falling funding issue, NASSCOM President R Chandrashekhar said, “While angel investments are the critical first piece that gets a startup going, series A fund is the one where the angel investors really make their exits and make money. That’s what incentivises them to continue their investments.”

“We had pointed that out and felt that corrective measures are needed. However, we did not find that being addressed in the Budget,” he added.

The above development was first reported in India.com

Earlier in May 2017, News Corp, had released Startup Deal Report Q1 CY2017. According to this report, investors prefers late stage funding. The report also stated that angel and seed investments fell both in volume and value terms with deal volumes reduced to half with 120 deals in Q1 CY2017 in comparison to 245 deals in the same period last year. Whereas Series A funding declined 65% in deal value on a Y-o-Y basis and Series B funding value improved 22% in the FY Q1 compared to the same period last year, despite deal numbers being lower by 16%.

Moreover, it can also be noted that the India's income tax department had demanded Rs 110 crore income tax from the e-commerce major Flipkart, which the company had challenged in the appellate tribunal and has reportedly lost the appeal.

The department’s claim was based on its findings that the company was showing losses by offering huge marketing discounts. According to them, the ecommerce major had a profit of Rs 408 crore in FY16 and thus a tax liability of Rs 110 crore, while the company had claimed a net loss of Rs 796 crore for the year.

Talking about demon of 'Angel Tax', startup ecosystem got disheartened when they found no mention of this in this year's Union Budget.

However, 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. Later, it was reported that government is considering a proposal to exempt investments from recognized angel investor groups in startups from angel tax.

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

Govt Planning No 'Angel Tax' on Startup Funding Via Recognized Investors

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.

Govt Planning No 'Angel Tax' on Startup Funding Via Recognized Investors

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.

Soon No Angel Tax For Startups Incorporated Before 2016 and Have Got Upto ₹10 Crore Funding

In order to provide some relief to startups from infamous 'Angel Tax', Department of Industrial Policy and Promotion (DIPP) 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.

The changes in the regime are being finalised by DIPP and it will soon notify about same, reported Economic Times citing a senior government official.

DIPP will also set up a separate committee for the recognition of such startups so that they get the relief from tax imposed on angel funding they get, atleast for pre-2016 startups.

The new amendment, if brought, will ease the concerns of about 300 startups that received funding from the Angel Investors Network. Startups incorporated after 2016 and recognised under the Startup India policy are spared this tax.

At present, the angel tax rate stands at a whopping 30 percent, which according to Nasscom has resulted in a 53 percent drop in angel funding during the first half of 2017.

Startups and investors were expecting that the government will resolve the issue of angel tax in the this year budget of 2018 however the issue was left out completely.

Thereafter, a new clarification by Finance Secretary Hasmukh Adhia stated that genuine cases of startup valuation as assessed by DIPP will be exempt from paying taxes on angel investments received. However, this will also be applicable only for startups founded before 2016.

Last month, a few entrepreneurs started a petition on Change.Org demanding that angel tax be abolished as it ran against the spirit of the Start-up India programme initiated by Prime Minister Narendra Modi.

At the same time, Nasscom, Indian Angel Networking, TiE Mumbai and a few other startup ecosystem players came together and issued a statement for abolishing angel tax. “The investors proposed solution is in line with the government’s innovative idea of startup certification. They proposed that the government recognise and approve angel investor groups, and startups raising monies from these groups be exempted from Section 56, unleashing faster-growing startups [that] create jobs and contribute to the tax collections,” the statement said.

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

Soon No Angel Tax For Startups Incorporated Before 2016 and Have Got Upto ₹10 Crore Funding

In order to provide some relief to startups from infamous 'Angel Tax', Department of Industrial Policy and Promotion (DIPP) 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.

The changes in the regime are being finalised by DIPP and it will soon notify about same, reported Economic Times citing a senior government official.

DIPP will also set up a separate committee for the recognition of such startups so that they get the relief from tax imposed on angel funding they get, atleast for pre-2016 startups.

The new amendment, if brought, will ease the concerns of about 300 startups that received funding from the Angel Investors Network. Startups incorporated after 2016 and recognised under the Startup India policy are spared this tax.

At present, the angel tax rate stands at a whopping 30 percent, which according to Nasscom has resulted in a 53 percent drop in angel funding during the first half of 2017.

Startups and investors were expecting that the government will resolve the issue of angel tax in the this year budget of 2018 however the issue was left out completely.

Thereafter, a new clarification by Finance Secretary Hasmukh Adhia stated that genuine cases of startup valuation as assessed by DIPP will be exempt from paying taxes on angel investments received. However, this will also be applicable only for startups founded before 2016.

Last month, a few entrepreneurs started a petition on Change.Org demanding that angel tax be abolished as it ran against the spirit of the Start-up India programme initiated by Prime Minister Narendra Modi.

At the same time, Nasscom, Indian Angel Networking, TiE Mumbai and a few other startup ecosystem players came together and issued a statement for abolishing angel tax. “The investors proposed solution is in line with the government’s innovative idea of startup certification. They proposed that the government recognise and approve angel investor groups, and startups raising monies from these groups be exempted from Section 56, unleashing faster-growing startups [that] create jobs and contribute to the tax collections,” the statement said.

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

Indian Government Scraps Angel Tax for Investors Funding Startups

Investors investing in startups in India will no longer be required to pay an angel tax to the government. Under a recent move made by the government of India to boost the country's entrepreneurship sector and job creation market, it has decided to let go of the so-called 'angel tax' for investors.

Fundings to startups, notified under the PM Modi announced government-approved plan in January this year, will not have to give tax even if it ends up exceeding the face value.

The existing rules state that any money raised by an unlisted company in India by the means of equity issuance has to be covered under this tax up to the extent that the amount is in excess of the fair market value. This extra money is taxable as "income from other sources" under the Section 56(2) of the Income-Tax Act India and charged the corporate tax rate, adding up to an effective tax of over 30 percent.

The venture capital community has been contesting for the removal of the angel tax for a long time now. According to them, the tax acts as a bug hurdle to their investment activities.

In majority of the cases, the valuation of the startups are way more than the market value as it is calculated on the potential of the idea rather than the startup's immediate worth. In such cases, the startups end up losing out a majority of the money inflow in angel taxes. But, now under the new notification issued by the Central Board of Direct Taxes, the startups would be now exempted from raising fundings from the rigours of Section 56(2)(viib).

Talking about the government's action to do away with the angel tax to a national business newspaper, Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP said, "This has been long awaited and is a very welcome step. The abolition of this so-called 'angel tax' has been a long-standing demand of the industry." However, he wasn't happy with the fact that the Indian tax officers could still question the earlier investments as being overvalued in the view of declining valuations on a global level and in the Indian sub-continent.