In a press conference, Finance Minister Nirmala Sitaraman announced to the media that the infamous Angel Tax would no longer be applicable for startups that were registered with the DPIIT. This comes as a momentous relief for startups in the country as it is widely believed to be an unfair drain on startups. She said, “To mitigate genuine difficulties of start-ups 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.”.
She also said that a member of the CBDT will head a cell. “A member will head a cell. Under him, problems will be addressed for startups. A startup having any issue can approach the cell for quick resolution of problems,” she said.
Sitharaman had earlier spoken about this issue in her budget speech in July saying, “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.”
Multiple start-up founders have 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. Section 56 (2) (vii)(b) of the Income Tax Act states that if a privately held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be taxed as income from other sources. Due to this provision, in November 2018, the Ministry of Consumer Affairs (MCA) issued notices to more than 2,000 startups that had raised money since 2013.
Image Sources –New Indian Express, Photo by Shekhar Yadav