Budget 2019: Government Proposes Steps To Remove Tax Woes Of Startups
Employees work at a startup office in Bengaluru, India. (Photographer: Dhiraj Singh/Bloomberg)

Budget 2019: Government Proposes Steps To Remove Tax Woes Of Startups


Finance Minister Nirmala Sitharaman proposed a series of steps to remove angel tax woes of startups and relaxation from income tax scrutiny.

She noted in her maiden budget speech that startups in India are taking firm roots and their growth needs to be encouraged.

“To resolve the so called angel tax issue, the startups and their investors who file requisite declaration and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums,” she said.

The issue of establishing identity of investors and the source of funds will be resolved by putting in place a mechanism of e-verification, she said. “With this, funds raised by startups will not require any kind of scrutiny from the income tax department,” the minister said.

Sitharaman also said that special administrative arrangements shall be made by the Central Board of Direct Taxes for pending assessment of startups and redressal of their grievances.

“It will be ensured that no inquiry or verification in such cases be carried out by the assessing officer without obtaining approval of the supervisory officer,” she said and added that thus the element of discretion with which startups suffer has been removed.

Also read: Budget 2019: Lower 25% Corporate Tax Rate Extended To More Companies

The minister also announced that category-II Alternate Investment Funds who would be investing in startups would be completely exempted from angel tax.

At present, startups are not required to justify fair market value of their share issue to certain investors including category-I AIFs.

"I propose to extend this benefit to category-II AIFs also. Therefore, valuation of shares issued to these funds shall be beyond the scope of income tax scrutiny," she said.

She also proposed to relax some of the conditions for carry forward and set-off losses in the case of startups.

“I also propose to relax some of the conditions for carry forward and set-off of losses in the case of startups. I also propose to extend the period of exemption of capital gains arising from sale of residential house for investment in startups up to March 31, 2021 and relax certain conditions of this exemption.”

Also read: Budget 2019: Government Returns Regulation Of Housing Finance Companies To RBI 

An angel investor puts funds in a startup when it is taking steps to establish itself in the competitive market. Normally, about 300-400 startups get angel funding in a year. Their investment in a unit ranges between Rs 15 lakh and Rs 4 crore.

Giving a major relief to budding entrepreneurs, the government in February relaxed the definition of startups and allowed them to avail full angel tax concession on investments of up to Rs 25 crore.

After claims being made by several startups that they were receiving tax notices under Section 56(2)(viib) of the Income Tax Act, 1961, to pay taxes on angel funds received by them, the Department for Promotion of Industry and Internal Trade in consultations with Central Board of Direct Taxes resolved the issue.

Section 56(2)(viib) of the Income Tax Act provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 percent.

Touted as an anti-abuse measure, this section was introduced in 2012. It is dubbed as angel tax due to its impact on investments made by angel investors in start-up ventures.

More than 540 startups have received exemption from angel tax so far.

Also read: Budget 2019: Finance Minister Proposes Starting Exclusive Channel For Startups

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