Partial Relief for Start-Ups as Centre Eases Angel Tax Exemption Rules

On the third anniversary of the government’s flagship Startup India campaign, the government has notified changes to Section 56 of the Income Tax Act, in a move that brings relief to start-up founders and investors dealing with the issue of “Angel Tax”. In a notification, the government on Wednesday said that all DIPP-recognised start-ups can apply to the department for approvals requesting an exemption from Angel Tax, or Section 56 2 (viib) of the Income Tax Act, which will then be sent to the Central Board of Direct Taxes (CBDT) for approval. But the changes do not ensure that start-ups will no longer receive notices on angel tax from the tax department.

Major Changes introduced:

As per the changes, all DIPP-recognised start-ups can apply to the department for approvals requesting an exemption from Angel Tax, or Section 56 2 (viib) of the Income Tax Act, which will then be sent to the Central Board of Direct Taxes (CBDT) for approval.

The changes are applicable to start-ups, recognized by DIPP, where the amount of paid-up share capital, and share premium of the capital after the proposed issue of share does not exceed Rs. 10 crore.

The notification specifies a list of documents that start-ups will have to submit to the DIPP while seeking approval. The CBDT is mandated to either approve or reject the applications within 45 days.

WHAT IS THE LATEST ISSUE?

At least 80 startups have received notices to pay angel tax since last year. Many founders have said they have been asked to pay up as much as 30% of their funding as a tax. Angels have also received multiple notices asking them to furnish details on their source of income, their bank account statements, and other financial data.

Way ahead:

The changes proposed do not ensure that start-ups will no longer receive notices on angel tax from the tax department. The start-up community views this as a step in the right direction but insists that the issues facing founders and investors due to angel tax remain unaddressed through the notification.

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