Startups call for exempting more from angel tax

The Centre is gathering inputs from various stakeholders and is expected to come up with a detailed clarification on angel tax in the next few days.

Startups raised this issue, among others, at a meeting last week with the finance ministry and the Department for Promotion of Industry and Internal Trade (DPIIT). Besides this, they expressed concern at the move to bring foreign investors under the ambit of angel tax.

The industry has also sought flexibility to invest surplus funds in the money market and liquid instruments, said people aware of deliberations.

Also read | Budget 2023: scope of angel tax expanded, to cover foreign funding

Under Section 56(2)(vii)(b) of the Income Tax Act, if a closely held company issues shares at a price exceeding fair market value, computed in accordance with the prescribed methodology, the difference is to be taxed as income from other sources.

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This tax isn’t levied when the aggregate paid-up share capital and share premium of the startup after the issue of shares doesn’t exceed Rs 25 crore. This threshold was last revised in 2019, when it was raised from Rs 10 crore.The provision was put in place as an anti-evasion measure to prevent money laundering through inflated valuations, but has impacted startup and angel investments; hence, the term angel tax.

Startups registered with DPIIT aren’t covered under the provision as long as total investment, including funding from angel investors, does not exceed Rs 25 crore.

Also read | Exclusive: Valuation rules to be scanned for Angel Tax on foreign Investments

Concerns

The industry argues that the threshold is too low, with input costs and wage inflation having surged. The limit is a deterrent for startups to get registered under DPIIT, they say.

“Given the basic nature of startups, there is a need for continuous investment towards innovation and improvisations of products/processes,” the representation said. “Further, startups scaling up the operation to make it pan-India (or global) would need huge capital for setting up the logistics infrastructure.”

The Rs 25-crore threshold did not include shares issued by non-residents, venture capital firms registered as category I alternate investment funds (AIFs), or specified companies.

The Finance Bill 2023 removed this exemption and proposes to bring foreign investors under the ambit of the angel tax, which hitherto only applied to Indian residents and funds not registered as AIFs.

The startup ecosystem and investors have expressed concern as foreign investment remains a major source of funding.

Also read | ETtech Explainer: Has the Budget 2023-24 resurrected ‘angel tax’?