The government is considering exempting investments made by individuals in certain startups from the so-called angel tax to provide a level playing field with other angel investors and to nudge high net worth individuals to back innovation.
The Department of Industrial Policy & Promotion is working with the finance ministry on the details of the proposed exemption.
The department has held several meetings with angel investor networks and startups to finalise the new framework. “We felt that investments by individuals who may not be part of the angel network also deserve to get the tax benefit since they are also playing a role in building the startup ecosystem in the country,” a senior government official told ET.
Angel tax of about 30% is levied on the amount that exceeds the fair market value of shares issued by unlisted companies, which is treated as income from other sources. However, the levy has startups concerned over the possibility of discouraging investments and leaving them open to harassment by income tax officials.
Introduced in the Finance Act of 2012 by the then FM Pranab Mukherjee, the angel tax was aimed at curbing money laundering through the purchase of shares at a high premium. Startups incorporated after 2016 and recognised under the Startup India policy are already spared the angel tax. The government had been working on framing a policy to exempt startups receiving up to Rs 10 crore in angel investment and those set up before 2016 from the tax, ET had reported earlier.
The department has recognised 7,578 startups so far and has provided funding support to 75 of them. However, several startups have received notices to pay angel tax amid ambiguity over how to assess the fair value of shares, a grey area that’s acknowledged by the Startup India Action Plan, a government initiative introduced in January 2016 to accelerate the spread of startups in the country.
“In the context of startups, where the idea is at a conceptualisation or development stage, it is often difficult to determine the fair market value of such shares. In majority of the cases, FMV is also significantly lower than the value at which the capital investment is made,” the Startup India Action Plan stated.
Earlier this month, the country’s apex direct taxes body provided some relief to startups that were asked to pay angel tax. “No coercive measure to recover the outstanding demand would be taken,” the Central Board of Direct Taxes told its officials in a letter.