Government mulls tax concession limit on angel funding raised by startups

The Narendra Modi government is reportedly contemplating establishing a limit on the tax concessions that can be availed by startups on investments from angel investors, as per a government official. Such a move could help budding entrepreneurs across the country.

Numerous startups have raised concerns regarding the taxation of angel funds under Section 56 of the Income Tax Act.  It provides that where a company issues its shares at a price above their fair market value, the amount received in excess of the fair market value will be taxed as income from other sources. Around 18 startups have received notices from tax authorities regarding the same.

“The idea is not to tax risky investments. So we are trying to make a mechanism for that. We will be coming out with a notification soon on this and another notification will be issued by the IT department,” the official was quoted saying.

Startups have, in the recent past, communicated to the government their grievances on the angel tax provision, which they consider to be unfriendly to them. The angel investments were taxed at a rate of 30%. Angel investors typically fund a startup in its infancy to help the company establish itself in the market. The official went on to add that the Government is also considering extending the tax benefits with retrospective affect to certain startups.

As per the deliberations, the inter-ministerial board under the Department for Industrial Policy and Promotion (DIPP) would certify whether a startup is eligible for exemption from income tax and angel tax.

Typically, approximately 300-400 startups receive angel funding in a year. Furthermore, prior to this ,  the Central Board for Direct Taxes (CBDT) directed the tax authorities not to take coercive steps in recovering taxes pending from startups, under a specific provision of the I-T Act.

(Picture courtesy: myHQ Digest)

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