First of all, what is angel tax? Who all are supposed to pay it? For all the aspiring entrepreneurs it is important to understand that angel tax is tax levied on capital raised by an unlisted company from any individual against an issue of shares in excess of the fair market value as “income from other sources” under Sec 56 (2) of the Income Tax Act. It is basically applicable on startups.
Now there are two sides to this. First, angel tax was introduced by the government in 2012 and was criticized by most entrepreneurs as well as established firms as a major hurdle for startups.
Co-founder of the Gurgaon-based Rocket Internet said
“Raising initial rounds of funding is hard for any company. The tax creates an unnecessary burden on start-ups.”
It was seen as a setback for funding already cash-strapped startups. A lot of startups and firms petitioned and lobbied the government for a long time to be exempted from the burdensome angel tax.
Now comes the good news, this month itself the government scrapped the angel tax. Yes, you heard that right. But, as always, there is a flip side to this too. Not all startups are eligible for being exempted from paying the angel tax. As per the new norms, only firms classified as startups under the new government regulations will be eligible for tax exemption and other tax related benefits.
The eligibility criteria include that the startups would need to get a certificate from the Inter-ministerial Board of Certification stating that the company is not more than five years old and its turnover does not exceed Rs 25 crore. It also needs to be working towards innovation and commercialization of new products and services and driven by technology or intellectual property. There aren’t many startups that have gone for this certification as yet. Also, the new regulation is not applicable to retrospective investments. So in this way, the scrapping only benefits very few startups who can actually meet the criteria.
Although this is a long-awaited dream come true but the business ecosystem’s players are not quite happy with it. Srivastava is still pursuing the government to find a way to certify angel groups so that investments made through them can be exempted from taxation.
Saurabh Srivastava, Co-founder of Indian Angel Network said,
“It will definitely have a positive impact but it is not a complete but a partial solution. This will be the next logical step and would solve 99 per cent of the problem.”