Govt tweaks I-T Act to give start-up investors relief from Angel Tax

The Commerce and Industry Minister Suresh Prabhu has approved a notification regarding certain provisions of the Income Tax Act to give relief to start-up investors from the Angel Tax. The decision was made after Centre received representations from start-ups seeking relief from the often ambiguous angel tax.

Prabhu passed a notification pertaining to Section 56 sub-section (2) clause (VII-B) of the Income Tax Act which increases the exemption limit to Rs 50 lakh from Rs 25 lakh for returns on the income a year before an investment, an ANI report said. The move is expected to boost growth among start-ups, the report said.

Floated for the first time during the UPA regime, angel tax is levied on the difference between the premium value of shares and fair market share values. The ambiguity in the tax lies in the premium value, which might be classified as higher than the fair market value by the taxman. In such a case, a show cause notice is issued to the start-ups.

As per the latest notification, a start-up recognised by the Department of Industrial Policy and Promotion (DIPP) will be eligible to apply for approval of exemption if:

1. The aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of a share, if any, does not exceed Rs 10 crore.

2. The investor/proposed investor shall have – 1) Returned income of Rs 50 lakh or more for the financial year preceding the year of investment/proposed investment, and 2) Net worth exceeding Rs 2 crore or the amount of investment made/proposed to be made in the start-up, whichever is higher, as on the last date of the financial year preceding the year of investment/proposed investment.

The recognised start-ups eligible for exemption will have to submit their applications to DIPP, which will then forward it to the Central Board of Direct Taxes (CBDT). The direct tax authority has been given the mandate to take a call on approving or rejecting a start-up’s request for exemption within 45 days.

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