Bringing cheer to the angel investors’ community, the Income Tax (I-T) department has exempted them from income tax on their investments in startups with effect from April 11, 2018.
Subject to certain conditions laid down by the department of industrial policy and promotion (DIPP) last month, including the criteria of share capital and share premium of the startup not exceed Rs 10 crore, following such investments, the newly-introduced tax concessions now makes it mandatory for startup ventures to have merchant banker-validated valuations, to determine the (FMV) of shares in accordance with the Income Tax Rule 11 UA.
In its notification dated May 24, the Central Board of Direct Taxes (CBDT) has earlier stated, “The Central Government, hereby notifies that the provisions of clause (viib) of sub-section (2) of section 56 of the said Act shall not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the consideration has been received for issue of shares from an investor in accordance with the approval granted by the Inter-Ministerial Board of Certification.”
The CBDT also said that ‘resident persons’ investing in start-ups would not be subject to taxation under Section 56 (2) (viib).
Angel tax, or tax on capital raised by issue of shares received by an unlisted company in excess of the fair market value of the shares has long been a bone of contention between the I-T department and countries’ investment fraternity – that regarded it as an impediment to entrepreneurship, hampering investors’ confidence.
Aimed at curbing money laundering through the purchase of shares at a high premium, the then Finance Minister Pranab Mukherjee initially presented the idea of angel tax in the Finance Act of 2012.
