A solution for India’s vexed angel tax may be around the corner, with the industry department setting up a panel comprising startups, angel investors and income tax officials to look into the issue.

Ramesh Abhishek, secretary in the department for promotion of industry and internal trade (DPIIT) who heads the panel, said a solution is expected in the next four-five days.

DPIIT on Monday held consultations with a select group of startups and angel investors at a meeting also attended by officials from the Central Board of Direct Taxes (CBDT).

“We had a round table on the issue of angel tax. We have got a number of suggestions. We will form a smaller working group and try to come with some solution in next four-five days," Abhishek said after the meeting.

India introduced a so-called angel tax in 2012, which counts investments received by startups above their fair market value as taxable income, much to the dismay of angel investors and the startup community.

According to a person who attended Monday’s meeting, while CBDT officials were against scrapping the angel tax altogether citing the possibility of a spurt in shell companies engaged in money laundering, they were ready to look at options to bring a carve-out for startups.

“Representatives of startups present in the meeting suggested that investments up to ?25 crore in startups could be given automatic exemption from angel tax or startups registered with DPIIT could be asked to submit additional documents to prove their genuineness," the person said on condition of anonymity. “The CBDT officials looked willing to consider the second option. Further discussions will take place on the proposals and a way out is expected soon."

Sachin Taparia, founder and chairman of social media platform LocalCircles, said CBDT and DPIIT have committed to coming up with a fresh notification to provide relief on angel tax in a week. “Some of us will be working with them during this period. The objective is to devise a mechanism through which startups can be differentiated from shell companies and get a blanket relief from angel tax," he added.

A survey by the Indian Venture Capital Association on LocalCircles showed that 73% of the startups that raised capital have received one or more angel tax notices under the Income Tax Act since their inception.

When asked what happens to the angel tax notices already sent to startups, Abhishek said CBDT would not take any coercive action against startups.

Akhilesh Ranjan, a member of CBDT who attended the meeting, said most of the notices issued to startups are for initiation of assessment. “The number of cases where actual tax demand has been raised is far less," he added.

Last month, DPIIT eliminated the need for certification from an inter-ministerial body for startups seeking exemption from angel tax demands. Such applications routed through DPIIT will now be processed by CBDT within 45 days. However, startups were not happy with the clarification and sought a blanket exemption from angel tax.

Angel tax, framed as an anti-abuse provision, was introduced in the Income Tax Act in 2012 to curb the practice of politicians accepting bribes in the guise of share premium in unlisted firms set up by them. Section 56(2)(viib) of the Income Tax Act provides for taxation of the share premium that is above the fair valuation of shares as “other income".

As startups are valued on the basis of the business potential of their ideas, which could change with time, they find it hard to justify the premium.

Tax officials prefer to value these enterprises on the basis of their net asset value, but companies tend to be valued on the basis of their earnings potential.