What is Startup Angel Tax ?
Angel tax is a term dedicated for direct income tax levied upon the start-ups in lieu of the funds raised through the angel investors. The tax procedure has been decided to be put up on the exact value more than the fair value or fair market value.
Based upon the tax levied on the startups by the government, the term has been coined as Startup angel tax. Entire domestic investment or the received funding can be put under the diameter of startup angel tax charged nearly at 30% rates.
Reasons for introducing Startup Angel Tax:
Startup Angel Tax was proudly launched in the year 2012 by the ex-finance minister Sri Pranab Mukherjee to curb money laundering like activities in the country. The initiative got implemented by the government at the full pace which negatively affected the angel investments received by the startups. Accordingly, it started to be referred as the ‘Angel Tax’.
When can be Angel Tax levied for the startups?
The protocols prepared for levying Angel Tax on the startups under the head ‘Income from Other Sources (IFOS)’ under section 56(2)(viib) after occurrence of the following conditions:-
ØThe originally calculated valuation seems higher than the fair market value or simply the fair value.
ØThe sum total of the investment comes more than 10 crores inclusive of the share capital and the premium amount.
Ø Fund is supposed to get raised via the share capital sources.
Is there an exemption available from this startup angel tax?
It was decided by the government this year in April 2018 to provide an exemption to the startups under section 56 of the Income Tax act. The condition for the exemption however was mentioned clearly.
The protocol developed by the government for the tax exemption included the case where the total investment inclusive of the funding from the investors must not exceed Rs.10 crores.
An approval from inter-ministerial board is even required along with the valuation certificate issued by the merchant banker. Moreover, the tax relief is preferred to get implemented only when the angel investor holds a minimum net worth of Rs.2 crores.
However, the three preceding financial years with average returned income of over Rs. 25 lakh can even get considered for startup angel tax exemption by the government.
Latest update by the government based on Startup Angel Tax:
As per the records, almost 80 startups have been served the administrative notices by the government to pay the angel tax since last year. As per the feedback, most of the startup founders have submitted that they have been asked to pay as much as 30% of their total funding as tax.
Angel startups have been received the notices by the income tax to make their source of income clear attaching the concerned bank account statements and other financial information.
To meet the demands and submit the essential documents, chartered accountants are getting hired than opting for the procedures concerned with merchant bankers.
Charges have been noticed to be piling up for CA (Chartered Accountant) fees for filing an appeal for all those startups who have received a notice from the income tax.
Government of India is strict as ever concerning the issue and set up a committee to look over the process and provide needful assistance as per the mentioned list of provisions.