Ahead Of Budget, DPIIT Recommends Scrapping Angel Tax For Startups

With the Union Budget expected to be released later this month, the Department for Promotion of Industry and Internal Trade (DPIIT) has reportedly recommended the removal of the contentious angel tax for startups. 

“Based on consultations with the startup ecosystem we had, we have recommended that in the past as well, we have recommended this time also,” Economic Times quoted DPIIT Secretary Rajesh Singh as saying. 

It is pertinent to note that the recommendations of the department are not binding on the government. 

As per the report, Singh said that the DPIIT has sent written inputs from industry associations to the finance ministry to consider the repealment of the angel tax. “Ultimately, the integrated view will be taken by the finance ministry on angel tax. It’s just an input from our side. We have done it several times,” Singh added.

Angel tax is payable on capital raised by unlisted companies if the value of the shares issued to investors exceeds their fair market value (FMV). It is levied above the rate of 30%. 

Last month, while speaking with Inc42, former CFO of Infosys and partner at Aarin Capital, TV Mohandas Pai termed angel tax as a “constant blot” in what has otherwise been a bright decade for India’s startup ecosystem. 

“The opposition included its removal in their manifesto, despite being the ones to introduce it. The Modi government should repeal the law to eliminate angel tax,” Pai said. He urged the government to resolve all disputes promptly and refrain from harassing people with unnecessary complications.

The opposition of the tax is not without reason. Introduced in 2012, the Section 56(2)(viib) in the Income Tax Act, 1961 was aimed at keeping shell companies at bay and tightening the noose on circulation of black money. 

However, starting 2016, tax officials began issuing notices to startups to pay angel tax and questioned new-age tech companies over their valuation methodology and their revenue not matching the projected value.

While the Centre’s bid behind the tax levy was to curb the flow of unaccounted money, the regime, as per industry stakeholders, failed to distinguish between genuine and fraudulent cases.

As a result, the Centre, in February 2019, notified G.S.R 127(E) guidelines that allowed startups to seek angel tax exemption to allay the concerns of industry stakeholders. However, just 10,939 startups have applied for exemption from angel tax so far out of the 1.14 Lakh startups registered with the department.