DIPP invites startup leaders to discuss angel tax issue on February 4

The call for discussions comes shortly after the government eased some norms in the angel tax framework.

Apart from saying that all cases of tax claims from start-ups will be dealt with a soft hand, the government instituted a new mechanism for angel complaints, according to the DIPP's notification on January 16.

Start-ups looking for an exemption from the angel tax will now have to submit their application directly to the DIPP. It is no longer required to have the start-up’s valuation vetted by a merchant banker, or argued for with the government’s interministerial-board, the body that earlier used to hand out a certificate of 'innovation' to start-ups.

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DIPP had also said that start-ups incorporated before April 1, 2016, a cut-off date set earlier, can apply for these provisions.

Around this time, various bodies including iSPIRIT, Indian Private Equity & Venture Capital Association (IVCA), Indian Angel Network, had written to start-ups over hurdles faced from angel tax.

Incorporated into the Income Tax Act in 2012, to prevent money laundering through shell companies, angel tax has inadvertently become a major pain point for start-ups. It says that those raising money on a valuation higher than the fair market value according to the tax department’s calculations will have to pay the tax.

Start-ups began receiving tax demands and the issue became serious when I-T officials began demanding a list of financial documents from start-ups and their angel investors. Sometimes, an impasse would also be reached as the taxmen would not agree to the valuations ascribed to a start-up by a merchant banker or a chartered accountant, thus leading to a stand-off.