Income Tax Department has provided a significant relief to the Angel Investors by exempting their income subject to compliance of certain conditions. The conditions have been laid down by Department of Industrial Policy and Promotion.

The CBDT in its notification dated 24.05.2018 stated that “The Central Government, hereby notifies that the provisions of clause (viib) of sub-section (2) of section 56 of the said Act shall not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the consideration has been received for issue of shares from an investor in accordance with the approval granted by the Inter-Ministerial Board of Certification.”

This tax relief is going to impact the startups which are approved by an inter-ministerial panel, i.e. in which the paid up capital and share premium of the beneficiary company does not exceed Rs 10 crores after the issue of shares. This notification is retrospective in nature and applies w.e.f. 11.04.2018.

Since, there has been an amendment in the process of valuation of shares, it will be compulsory for the startup ventures to have merchant banker validated valuations, to determine the fair market value of shares. The Chartered Accountants have been excluded from the process. Currently, the fair value of a startup is being assessed by income tax officials at their discretion, which the ecosystem members point out, is being done in a completely arbitrary manner. Angel investors, too, will have to fulfill prescribed criteria. Only those investors with a minimum net worth of Rs 2 crore, or an average returned income of over Rs 25 lakhs in the preceding three financial years are eligible for 100% exemption.

‘Angel tax’, or tax on capital raised by unlisted companies by issuing shares in excess of their ‘fair market value’, has been a contentious issue for startups for more than 18 months after the government exempted ‘innovative’ startups from this tax.

It is expected that the latest notification will go a long way in establishing individual investors at par with venture capital funds — a long-standing demand from angel investor groups.

In the late 2017, a number of startups received tax notices. As per a survey done approximately 39% of 2,860 startups that took part in its survey said they received income-tax notices this year. Angel groups said they should be allowed to register as legal entities to make investments freely so that the trend of fall in angel-funding can be reversed.

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Bharat Poplani