Start-ups wants contentious angel tax proposal scrapped

Various start-ups have raised concerns on notices sent to them under the Section 56 of Income Tax Act to pay taxes on angel funds received by them.

Illustration: Uttam Ghosh/Rediff.com

As the government grapples with 'angel tax', the Mumbai Angels Network on Wednesday said scrapping a contentious section in the Income Tax Act is the only solution which can help the start-up ecosystem.

Claiming that taxation provisions have been misused, government is taxing fund infusions into start-ups.

The idea is to arrive at a fair valuation and consider the amount over the fair valuation as a premium and tax it at 30 per cent.

Various start-ups have raised concerns on notices sent to them under the Section 56 of Income Tax Act to pay taxes on angel funds received by them.

"...till and until you actually scrap the section the problem is not going to away," Mumbai Angels Network CEO and managing director Nandini Mansinghka said.

Stating that the section may not go off, she said there is a "lot of intent from the government side" to solve the problem.

Mansinghka, who was part of the meeting on February 4, said the committee is working with the government on defining a start-up and an angel investor.

"These are tricky questions and will not come up with the perfect solutions but I think in about a couple of days we will get a better solution on it. It is an ongoing discussion with the government that we will have to continue to do to figure out the right answer," she said.

Sounding sceptical, Mansinghka said the problem may just reduce only by a bit as more companies can come inside the start-up ambit and stressed on the importance of the prevalence of the section.

The government is considering giving complete exemption to start-ups from angel tax once they are certified by the Commerce and Industry Ministry, however, as per reports The Central Bureau of Direct Taxes is unlikely to allow exemptions to start-ups who have raised money from accredited investors.

Giving relief to budding entrepreneurs last year, the government allowed start-ups to avail tax concession only if total investment, including funding from angel investors, does not exceed Rs 10 crore.

Though start-ups are demanding complete exemption from this tax, the government may increase investment limit for tax exemption to Rs 25-40 crore.

Section 56(2)(viib) of the Income Tax Act provides that the amount raised by a start-up in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent.

Touted as an anti-abuse measure, this section was introduced in 2012.’

It is dubbed as angel tax due to its impact on investments made by angel investors in start-up ventures.

Last month, the government eased the procedure for seeking income tax exemption by start-ups on investments from angel funds and prescribed a 45-day deadline for a decision on such applications of budding entrepreneurs.

Finance Minister Piyush Goyal on Monday assured that genuine start-ups may get a breather from the provisions.

As per the Startup India action plan, start-up means an entity, incorporated or registered in India not prior to five years, with annual turnover not exceeding Rs 25 crore in any preceding financial year, working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.