Only 2 startups applied for tax exemption since April, says govt, as clamour over ‘angel tax’ rises

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Updated: December 21, 2018 4:23:25 PM

The commerce and industry ministry today asked startups to seek exemption from tax on angel funding by approaching an eight-member inter-ministerial board set up back in April.

Multiple startup founders have recently claimed of receiving notices earlier this week from the IT department to pay taxes on angel funds raised by them. (Image: Reuters)

Amid rising complaints about the tax on angel funding, the government has directed the aggrieved startups to seek tax exemption using an existing facility, which has remained underused despite being in place for over eight months. The commerce and industry ministry has asked startups to approach an eight-member inter-ministerial board to seek exemption from what these companies call the ‘angel tax’. The board was set up for the purpose in April 2018.

“We have a mechanism for exempting genuine investments in startups. So, people should use that mechanism. Everything is online, they should take advantage,” Ramesh Abhishek, Secretary in the department of industrial policy and promotion (DIPP) told PTI.

So far, only 2 startups have applied for tax exemption to the board since April, Abhishek said.

Multiple startup founders have recently claimed of receiving notices earlier this week from the IT department to pay taxes on angel funds raised by them.

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Section 56(2) (viib) of the Income Tax Act provides that the amount raised in excess of a startup’s fair market value is taxed at 30% as income of the firm from other sources. Abhishek said that the section was enabled to prevent money laundering, and investments made by AIF (alternate investment funds) are exempted from this provision.

The DIPP had sought to calm the tax fear among startups yesterday by saying in a statement that has reached out to the Department of Revenue (DoR) on the issue of notices by the Income Tax authorities to angel investors and companies. “Government is committed to protecting bona fide investments into startups,” the statement said.

Also, the commerce and industry minister Suresh Prabhu had on Tuesday tweeted of the issue being taken up with the finance ministry. “We have taken up the issue,” the minister tweeted in response to a tweet from Manipal Global Education chairman and investor in startups T V Mohandas Pai who sought to “intervene urgently”.

“For HNIs and other types of individual investors, there was no mechanism earlier. So, DIPP and income tax department put in place a mechanism and set up an inter ministerial,” Abhishek added.

However, experts question the way to evaluate a startup’s fair market value. Former co-founder at Infosys Kris Gopalakrishnan said there was no way one can come out with the exact valuation for a start-up, quoted PTI.

“Clearly, this is a dampener to the whole entrepreneurial ecosystem,” said Gopalakrishnan adding, “Sometime back, they (the government) had said it (angel tax) will not be levied, but it’s happening.”

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