In a big boost to start-ups, the government has abolished the so-called\u00a0`angel tax\u2019 for all classes of investors.<\/p>\n
\u201cTo bolster the Indian start-up eco-system, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors,\u201d Finance Minister Nirmala Sitharaman said in her Budget speech.<\/p>\n
Angel tax (Section 56.2 VII B) is an income tax of 30.6 per cent levied when an unlisted company issues shares to an investor at a price which is more than its fair market value.<\/p>\n
In the initial stage of being set up, when many start-ups depend heavily on foreign funds, the imposition of angel tax can affect flow of funds, according to the industry.<\/p>\n
The Department for Promotion of Investment and Internal Trade (DPIIT) had proposed abolition of angel tax to the Finance Ministry in line with industry demands.\u00a0<\/p>\n
Although start-ups registered with DPIIT are exempt from angel tax, a large number of start-ups in the country are unregistered. There are only about 1,34,260 start-ups that are registered.<\/p>\n
\u201cEarlier, start-ups were allowed a tax exemption from angel tax subject to certain conditions such as the amount of share capital and securities premium post-fund raise not exceeding \u20b925 crore, the end-use restrictions on funds raised by start-ups such as no investments in financial assets and a requirement to submit declaration in Form 2. The abolition of angel tax provisions will now enable start-ups to raise funds without any such conditions and compliance requirements,\u201d according to Anish Shah, Partner, M&A Tax and Regulatory Services, BDO India.<\/p>\n
Angel Tax was first introduced in 2012 to discourage the generation and use of unaccounted money through the subscription of shares at higher value than the fair market value.\u00a0<\/p>\n
However, start-ups had argued that their valuation was pegged by investors to their future potential and did not necessarily match their actual performance in the present.<\/p>\n
The industry has argued that the government is wrong in citing the difference between valuations and actual performance as a sign of money laundering, adding that investors fund start-ups based on their future potential.<\/p>\n