DPIIT-registered startups exempt from angel tax: FM

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.