After Startups, PE Funds Also Receive Angel Tax Notices

After startups, it is the turn of some Indian companies and PE funds to receive notices for concluding deals at higher valuations. As per an ET report, the tax department is questioning the valuation of certain deals, claiming that the premiums paid by the buyer should be considered as income and should pay angel tax.

At least 50 transactions are under the department’s scanner this year, as per people in the know. More companies in similar situations could receive tax notices. Even bigger companies, which may have invested in their subsidiaries, are being questioned.

This form of angel tax, which is applied to investments made at a premium to the fair value, was imposed on several startups earlier. While not many startups may have received fresh notices, Indian companies have started getting such tax demands, as per sources. In some cases, some multinational private equity (PE) funds too have received notices.

The difference between the premium and fair value was considered to be income and deemed taxable under section 56(2)(vii)(b) of the Income Tax Act, 1961.  However, the government issued clarifications in 2016 and this year as well to exempt investments by Indian residents in entities certified as ‘innovative’ startups, to encourage entrepreneurship and boost job generation.

But angel tax and valuations still remains a thorny issue between startups and the taxman and have become double edged sword for startups. The tax department has in several situations issued notices when the valuations were perceived to be lower than fair market value.

However this week it was reported that Department of Policy and Promotion (DIPP) is now in talks with the Ministry of Finance to exempt individual angel investors from angel taxes as well. This report comes after CBDT recently issued a circular instructing IT officials not to take any coercive measures to recover angel tax from startups,

The DIPP has held a number of meetings with the Ministry of Finance, angel investor networks and startups to finalise a new framework that could save both startups and angel investors from the ongoing repercussions of angel tax structure.

Amid growing protests from Indian startups, entrepreneurs and angel investors, the DIPP had  announced another exemption from angel tax, stating that startups founded before 2016 and with up to $1.56 Mn (INR 10 Cr) in angel funding will also be eligible for tax exemptions.

Earlier, the Income Tax department stayed the recovery proceedings of angel tax levied on companies that are recognised as startups by the DIPP. Hopefully, the conundrum around PE funds would also be resolved in time.

[The development was reported by ET]

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