Finance minister Nirmala Sitharaman said startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) will be exempt from angel tax, an anti-evasion provision in the Income Tax Act.
“Section 56 (2)(viib) of the Income Tax Act shall not apply to startups registered with the commerce ministry," Sitharaman said. Currently, there are 24,117 DPIIT-recognized startups.
In the Union budget in July, Sitharaman had said that startups and their investors, who file requisite declarations, will not be subjected to any kind of scrutiny in respect of valuations of share premiums.
The finance minister on Friday further added that the government will set up a separate dedicated cell housed under the Central Board for Direct Taxes (CBDT) for addressing problems of startups. Startups with an income tax issue can approach this panel.
The startup community welcomed the move. Vikas Vasal, partner and national leader, tax, Grant Thornton India LLP, said the initiative will boost the morale of entrepreneurs and investors. “The government has been proactive in addressing the concerns of startups and has taken a number of measures in the recent past in this direction. Removal of angel tax will go a long way in building trust and confidence in the startups and the investors, and shows government’s resolve towards ease of doing business in India and encourage entrepreneurship."
Srikanth Iyer, chief executive and founder, HomeLane.com, a Bengaluru-based home interior design startup, said these steps will lead to ease of doing business in India.
“It is immensely delightful for MSMEs (funded and bootstrapped) that the government has considered to waive ‘angel tax’ and simplify the flow of risk capital for young companies, which will allow early-stage ventures to raise seed capital. Without a thriving early-stage ecosystem, not just the interiors industry, but the economy as a whole would not realize its true potential.
Furthermore, their decision to fast-track GST refunds within 30 days and CBDT’s move towards setting up a dedicated cell to address tax problems will further ease business environment," said Iyer.
Angel tax has often been touted by the startup community as an unfair tax burden affecting young companies and their financial backers.
“We welcome the measures on angel tax. We have always believed that the Prime Minister and the government are very supportive of startups. We hope that the measures will be retrospectively applied to notices that have been sent and accordingly the notices will be withdrawn," said Sarbvir Singh of Waterbridge Ventures, an investment firm.
However, Anil Joshi, managing partner, Unicorn India Ventures, said the benefit of this provision will be limited as it is restricted to DPIIT-registered firms.
“In most cases, angels will ensure that the company is DPIIT-registered. The government needs to make similar tax provisions for friends and families that are not categorized as angels and have backed startups that are not DPIIT registered. This is common in tier II, III cities. This is something FM needs to consider, too," he added.