Easing The Process of Tax Redemption By Angel Investors To Boost Entrepreneurship

There is a growing wave of entrepreneurship and startups in India. Prime Minister’s Narendra Modi’s “Start-up India” initiative was launched to build a strong ecosystem for nurturing innovation and entrepreneurship in the country.  To promote an environment of innovations, employability and entrepreneurship across the country, the government has rolled out many programs and schemes.

One of the most dreaded things for a start-up is the issue of angel tax. Startups have been raising the issue of Angel Tax for years, requesting the government to abolish it.

Now Start-up can have a sigh of relief, as the government has finally eased the procedure for seeking tax redemption on Angel Tax.

The Issue of Angel Tax

Angel tax was introduced with the aim of keeping money laundering in check.  Angel Tax is a 30% tax that is levied on the funding received by startups from an external investor. However, this 30% tax is levied when startups receive angel funding at a valuation higher than its ‘fair market value’ and it’s considered as an income.

However, the major problem troubling both startups and investors is that there is no objective way to measure the “fair market value” of a start-up. Investors pay a premium for the idea and the business potential at the angel funding stage. But, the tax officials seemed to be assessing the value of the startups based on their net asset value at one point.

How To Seek Angel-Tax Exemption

Under the new procedure, startups will have to apply to the Department of Industrial Policy and Promotion (DIPP) with all the necessary documents.

The application of the recognised start-up shall be moved by the department to the Central Board of Direct Taxes (CBDT) with necessary documents. The earlier requirement of start-up to submit the report from merchant banker specifying the fair market value of shares has also been removed. But now, application procedure has been simplified by making application to CBDT through DIPP.

Who Can Seek Angel-Tax Exemption

According to the revised procedure, Startups which are recognised by the DIPP would be eligible to seek exemptions.

Startups, whose aggregate amount of paid-up share capital and share premium does not exceed Rs 10 crore after the proposed issue of shares, are eligible for angel tax exemption 
In addition to this, It is also mandatory that the angel investors must have filed income tax returns of at least Rs 50 lakh for the year preceding the investment year.