The government has decided to form a working group to look into the issue of angel tax being faced by startups. This is expected to provide further relaxation in norms for startups.
Background
Last month, the government eased the procedurefor seeking income tax exemptionby startups on investments from angel funds and prescribed a 45-day deadline for a decision on such applications.
The Centre did away with the requirement for start-ups to have the fair market-value of their shares ascertained by a merchant banker.
However, there is no clarity on what is the definition of start-up. As a result, various start-ups have received notice to pay taxes on angel funds.
What Is Angel Tax
Angel tax is a term used to refer to the income tax payable on capital raised by unlisted companies via issue of shares where the share price is seen in excess of the fair market value of the shares sold. The excess realisation is treated as income and taxed accordingly.
The tax was introduced in the 2012 Union Budget to arrest laundering of funds.
It has come to be called angel tax since it largely impacts angel investments in startups.
Under the Section 56(2)(viib) of the Income Tax Act, closely-held companies, when issuing shares, are charged 30 per cent tax on the difference between funds raised as per the actual valuation and the fair-market value of the company.
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