Home >Companies >Start-ups >Govt may exempt funding by recognized investors in start-ups from angel tax

New Delhi: The government is considering a proposal to exempt investments from recognized angel investor groups in start-ups from the so-called angel tax, two people aware of the matter said.

A committee has been set up under the Securities and Exchange Board of India (Sebi) to form a framework for regulating angel investments, the people said on condition of anonymity.

Sebi did not respond to an email seeking comment.

The move comes on the back of mounting criticism of the angel tax.

According to Section 56 (II) (viib) of the Income Tax Act, for start-ups raising capital at a valuation higher than the “fair market" value determined by the government, the excess capital is construed as income and is taxed.

Start-ups have complained about the angel tax, especially after many of them were served tax demands over the last few months.

However, the income tax department, in a notification issued Tuesday, said it stayed recovery proceedings on those that comply with the definition of a “start-up" as defined by the Department of Industrial Policy and Promotion (DIPP).

“In the past few years, the finance minister has provided exemption from angel tax by excluding investments by non-residents, venture funds, angel funds, and the DIPP-registered start-ups. Astonishingly though, the start-ups and Angels of Indian origin are not excluded from taxation," said Sunil Goyal, managing director at YourNest, an early- stage venture fund.

The latest move may extend the exemption to angel investors, as part of the larger exercise to regulate the angel investor community.

In his budget speech on 1 February, finance minister Arun Jaitley had said “venture capital funds and angel investors need an innovative and special developmental and regulatory regime for their growth… We will take additional measures to strengthen the environment for their growth and successful operation of alternative investment funds in India."

Prominent angel groups such as Indian Angel Network, Venture Catalysts, AngelList and LetsVenture, among others, are currently presenting proposals to the Sebi panel on the contours of the regulations.

“Accredited investor guidelines from the more mature startup ecosystems are being considered as well as how to classify various angel networks bodies," said Utsav Somani from AngelList, a seed investment firm.

“They are also looking at how to bring the private placement industry under the regulatory purview. This involves discussions on an efficient way of registering with the regulators so that angel investing community grows but is relevantly protected due to the high-risk nature of this asset class," he said.

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