Reiterating his earlier stance on angel tax, commerce and industry minister Piyush Goyal has again said that there was no such thing in the Indian market.
Addressing a conference hosted by the Confederation of Indian Industry in Delhi, on Wednesday, Goyal said that the issue of angel tax came up in the first place “because we have thousands and lakhs of shell companies which the Modi government de-recognised and on which we are taking action, where hawala operators used to create fake equity capital by issuing shares at a huge premium with no business activity at all and using that for money laundering.”
He assured that startups will never be harassed and that the government is taking steps to promote them. “They have to do the limited activity of registering themselves so that good law is not misused by a few people,” he said.
To begin with, Section 56 (2) (vii)(b) of the Income Tax Act 1961 said that if a privately-held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be taxed as income from other sources. This has been referred to as angel tax.
Due to this provision, in November 2018, the Ministry of Consumer Affairs (MCA) issued notices to more than 2,000 startups that had raised money since 2013. The notices were mostly sent to the startups whose valuations had fallen after the first round of fundraising.
After an industry-wide uproar, Department for Promotion of Industry and Internal Trade (DPIIT) and Central Board of Direct Taxes (CBDT) issued a notification on February 19, 2019 saying, “All the startups are allowed to receive angel tax exemption regardless of their share premium values given that the aggregate amount of paid-up share capital and share premium of the startup after issue or proposed issue of shares, if any, does not exceed, INR 25 Cr.”
As a result, CBDT exempted 702 startups till June 21. Later in August, a fresh round of relief came after finance minister Nirmala Sitharaman announced that Section 56(2)(viib) of the Income Tax Act 1961 would not be applicable to the startups registered under DPIIT.
Also, a dedicated cell under a member of CBDT has been set up for addressing problems of startups. Any startup with any income tax issues can approach the cell for a quick resolution. CBDT has issued a consolidated circular consisting of all the clarifications on the tax issues hurting the Indian startups, including the angel tax.