Commerce and Industry Minister Suresh Prabhu has asked his finance counterpart Arun Jaitley to resolve taxation issues being faced by startups in getting angel funds with a view to promoting budding entrepreneurs. In a communication to the finance minister, Prabhu said resolution of the taxation issue would help in supporting the startup ecosystem and nurturing innovation and entrepreneurship. The issue assumes significance as several startups and angel investors have raised concerns over notices received from income tax authorities.
“This is one of the key issues affecting investment into early stage startups, commonly referred to as angel tax. This issue has been a major impediment in flow of investment into startups,” Prabhu has said. At the initial stage of a startup, angel investors play a significant role by not just providing necessary resources but also business mentoring. They are critical bridge between founders’ own resources and mainstream venture funding.
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The government, last week, decided to set up an expert committee to look into all taxation issues being faced by startups and angel investors. The Central Board of Direct Taxes (CBDT) has said that “no coercive action or measures to recover the demands of completed assessment under income tax would be taken” against such firms.
The committee of experts will make recommendations on individual cases of recognised startups. Startups have raised concerns on taxation of angel funds under Section 56 of the Income Tax Act, which provides for taxation of funds received by an entity.