Tax Regulator Rules Out Coercive Action In Angel Tax Issue

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According to The Times of India, the Income Tax Department, in some cases, has levied the taxes-cum-penalty amounting to nearly 50 percent of the funds raised.

The government on Thursday announced big relief to startups that have come under the threat of taxation for having raised investments above fair value of their shares, a common practice among new age enterprises founded on innovative business models.

The angel tax has reportedly deterred angel investors from infusing funds into startups for fear of losing a significant chunk of their investment to the taxman.

The decision to give investors in start-ups exemption from income tax was aimed at addressing a key issue faced by angel investors who put money during early growth stage, and would also provide level-playing field for all investors.

"In this regard, a notification by the DIPP will be issued shortly", it said.

Under Section 56 (2) (viib) of the Income Tax (I-T) Act, if a privately held company issues shares at an amount higher than the face value, or the fair market value, the difference between the issue price and fair market price is taxed as income in the hands of the startup.

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After a social media storm, Union Minister of Commerce & Industry and Civil Aviation Suresh Prabhu said that they have taken up the issue.

The committee to be set up with members from institutions like IITs and IIMs will make recommendations on issues relating to recognition of startups for exemption from share premium tax and "other connected matters".

Several startups have again raised concerns on taxation of angel funds under Section 56 of the Income Tax Act, which provides for taxation of funds received by an entity.

"Explained p" Startups incorporated after 2016 and recognised under the Startup India policy are exempted from the levy of "angel" tax. "Everything is online, they should take advantage", he said.

Normally, about 300-400 start-ups get angel funding in a year.

Sharma told Inc42, "There needs to have an accredited investor category enabling the regular startups to raise funds from angel investors easily with clarity on the source of funds". The government recognised startups do not face this tax.

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