Registered Startups Exempted from Angel Tax

Source: ET

Angel Tax refers to the income tax payable on capital raised by unlisted companies (i.e. Startups) via issue of shares, where the share price is seen in excess of the fair market value of the shares sold. This excess realisation is being treated as "income" and taxed accordingly.

Problem with Angel Tax

The fundamental problem with Angel tax is that it's imposed only for the resident investor/s who make the investments. Investments from NRIs and VC funds don't fall under the ambit of Angel Tax.

How was Angel Tax computed?

Angel Tax is levied at a hefty rate of 30.9% on net investments in excess of the fair market value. For e.g., if a startup receives Rs. 50 crore of investment by issuing 1 lakh shares at Rs.5000 each to an Indian investor and the fair market value is Rs. 2000 per share i.e Rs.20 crore only, then the startup will have to pay angel tax on the amount in excess of the fair market value i.e Rs. 30 crore. Therefore the Angel Tax payable in this transaction will be Rs. 9.27 crore (30.9% on Rs.30 crore).

The government, however issued a notification in Apr-19, to give exemption to startups u/s 56 of I.T. Act. However, in order to qualify for Angel Tax exemption, the startup should meet certain criteria which are as follows:

1. The paid-up capital and share premium of the startup should not exceed Rs. 10 crore after issuing shares.

2. The startup should procure the fair market value certified by a merchant banker.

3. The investor should have a minimum net worth of Rs. 2 crores and the average income in the last 3 financial years should not be less than Rs. 25 lakh.

On Aug. 23, among a slew of policy decisions, FM Nirmala Sitharaman announced that Angel Tax will no longer apply to startups registered with the Department for Promotion of Industry and Internal Trade or DPIIT. Under the new norms, startups can now court funding without investors having to reveal their financial details. FM also announced creating a dedicated cell headed by a CBDT member, to handle startup's tax-related grievances.