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Home / Latest News / Some relief to Start-ups from Angel Tax

Some relief to Start-ups from Angel Tax

January 19,2019:

The Author, Bhumesh Verma is a Corporate Lawyer with over 2 decades of experience in advising domestic and international clients, with a place in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters. He can be reached at bhumesh.verma@corpcommlegal.com.

Facing sustained pressure from start-ups and venture capital funds over the so-called angel tax, the government has relaxed norms for seeking exemptions from the controversial levy.

The regime was too harsh, arbitrary and a lot of documentation was required, so not many start-ups would or could apply for exemptions. The manifested intent behind these measures was to curtail black money, bribing and money laundering. However, start-ups were even scared of applying, fearing opening of the proverbial pandora’s box of government questions and investigations. The system, therefore and quite expectedly actually never took off.

A couple of days back, facing flak from all quarters over the arbitrary notices being served in this regard, the government issued a notification. The existing mechanism to approve start-ups applying for tax exemption under the Income-Tax Act, 1961 has been done away with.

However, the government hasn’t given in completely to abolish the tax completely and has offered only partial relief. Under the new regime, start-ups seeking exemption need not approach the inter-ministerial board. This board was set up about 3 years back with members from different Ministries, Reserve Bank of India, SEBI, etc. but didn’t have much work to do.

Henceforth, applicants have to file their applications through the Department of Industrial Policy and Promotion (DIPP) website, which will forward them to Central Board of Direct Taxes (CBDT). CBDT has to directly examine these applications and respond within 45 days of receipt of such applications.

However, only the start-ups which are approved by DIPP are eligible for these exemptions.

The requirement of submitting a valuation report from a merchant banker specifying the fair market value of securities is also being done with. Earlier Angel investors were supposed to share their income documents for last 3 years – this stipulation is also being taken off.

Some norms pertaining eligibility of investors and start-ups have been tweaked a little bit and many continue to be the same. Therefore, the ecosystem is still sceptical about the success of the new norms and the response from the affected quarter is quite mixed.

However, any change with an intent to bring about clarity and certainty in the system and promote entrepreneurship is a welcome step. Only time will tell the success and glitches in the new system.

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