Budget 2019: Angel Tax Exemption for Startups, Boon or Curse?

Recently, there is anguish for the term angel tax in the country. Let’s look at the meaning of angel tax for startups and why removal of angel tax in Budget 2019 may be a boon or curse for startups and Indian Economy.

Angel Tax Meaning for Startups

“Angel tax is the tax collected by the government on the investments raised by a start-up.”

Government is in support of start-ups and is coming up with various schemes for its growth. But, on the other side, a hefty tax of 30.9% has levied as angel tax which comes u/s 56 (2) (vii b) of Income Tax Act, 1961.

This tax is applicable for the start-ups who exceeds the fair value of the capital raised by their company. It says that an excess consideration received by the start-up will be treated as income of the start-up. Thus, resulting in tax at the rate of 30.9% levied on the excess value. There is an exception which says that venture capital firms are exempted for angel tax.

If we look at the roadmap of angel investment, we see a decline since the tax has incorporated. As per the records, angel investment has sunk to 191 in 2017 from 291 in the prior year.

Yet, there is chaos resulted from the notices from CBDT to pay angel tax by end of March. The start-ups are being sent notices with the outstanding tax amount which are being criticized by the majority. The counter-argument from the government says that this step is to avoid money laundering taking place in the industry.

Removal of angel tax, boon for startups?

Removal of angel tax is the next thing that start-ups are wishing for in Budget 2019. This may result in encouraging people and decreasing hardships for the current start-ups.

• Investment backup without any tax-stress;
• It will encourage the citizens to consider a start-up;
• For a start-up, major concern in money. If the tax is removed, it will help start-ups to do better and grow with high pace;
• It will share the risk between parties without any fear of tax;
• A rise in angel investment;
• Will support, “ease of doing business”.

Despite the boon that start-ups will witness in case the tax is removed, there is another side of the story too. There is a risk for the government that it is worried about.

• Evasion of tax will give rise to money laundering acts;
• Some are taking advantage of the scheme;
• One of the concern is – Why are start-ups getting or acquiring more investment than its value?
• Some acts leading to unaccounted income as an investment for start-ups;
• Acts will lead to abusing money laundering and rise in suspicious activities.

According to a tweet shared by DIPP India today, government has taken the first step to provide some relief.

The Department of Industrial Policy and Promotion has issued a notification for exemption on Angel Tax: https://t.co/9WpKtmLPTc
Suggestions are invited for better implementation of the recently announced Angel Tax exemption framework. Please write to us at dipp-startups@nic.in.

— DIPP India (@DIPPGOI) January 24, 2019

Let’s see where things go and what are the measures that the government will take in this matter. Yet, considering each factor will play an important role in the outcome of the issue.