With the Union Budget set for release later this month, the Department for Promotion of Industry and Internal Trade (DPIIT) has recommended removing the contentious angel tax for startups. DPIIT Secretary Rajesh Singh stated, ‘Based on consultations with the startup ecosystem, we have recommended this in the past and this time as well.’
However, these recommendations are not binding, and the final decision rests with the finance ministry. DPIIT has sent written inputs from industry associations to the finance ministry for consideration. Singh emphasised, ‘Ultimately, the finance ministry will take the integrated view on angel tax. It’s just an input from our side. We have done it several times.’
It is levied at over 30%, is payable on capital raised by unlisted companies if the value of shares issued exceeds their fair market value (FMV). TV Mohandas Pai, partner at Aarin Capital and former CFO of Infosys, described angel tax as a ‘constant blot’ in an otherwise bright decade for India’s startup ecosystem. ‘The Modi government should repeal the law to eliminate angel tax,’ Pai urged, emphasising the need to resolve disputes promptly and avoid unnecessary complications.
Introduced in 2012 under Section 56(2)(viib) of the Income Tax Act, 1961, the angel tax aimed to curb shell companies and black money circulation. However, since 2016, tax officials have targeted startups with notices demanding angel tax, questioning their valuation methods and revenue projections.
In response, the Centre introduced G.S.R 127(E) guidelines in February 2019, allowing startups to seek exemptions from angel tax. Yet, only 10,939 startups have applied for exemption out of the 1.14 lakh registered with the department.
The industry stakeholders argue that the tax regime has failed to distinguish between genuine and fraudulent cases, and the repeal of the angel tax could foster a more conducive environment for startups in India.
TV Mohandas Pai, among other industry leaders, has underscored the need for legislative reform to eliminate what he describes as a hindrance to the thriving startup ecosystem. The Centre’s introduction of G.S.R 127(E) guidelines in 2019 aimed to alleviate these concerns by providing exemptions, yet the uptake remains limited, suggesting persistent challenges in implementation and clarity. Vakilsearch stands ready to support startups navigating the complexities of India’s tax landscape, including ITR filing. Opt for Vakilsearch for accurate and hassle free Tax filing.
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