DPIIT And CBDT On Angel Tax: Will Ideas Transform Into Action?

The policy initiatives taken by the DPIIT need to be also backed up by startup friendly tax administration by the CBDT to ensure that the startups survive and thrive in difficult economic conditions.

Startups by nature are innovative and full of enthusiasm to break new ground. They need funding, guidance and nurturing. Since the announcement of the Startup India policy in 2016, the Government, through the medium of DPIIT and CBDT, has displayed a lot of enthusiasm to ensure a conducive environment for startups. However, three years later, startups have not been able to reap the benefits of such pro-activism.

Angel Tax

Like every other business, startups need someone to put faith in them and to fund them. Similar to other business, what seems to be a bonanza in terms of good valuation ensuring generous funding, could end up invoking the applicability of “Angel Tax” under Section 56(2) (viib) of the Income Tax Act, 1961. The said section seeks to tax the excess consideration for issue of shares received from a resident investor in the hands of the company. Any value received in excess of the fair market value of shares is treated as income in the hands of the startup. The plethora of notifications, at times changing the definition of startup, at times imposing various eligibility conditions on the startup, suggest that obtaining funding is easier than convincing the taxman about the genuineness of such funding.