With a little over a week to go for the Union Budget delivery on July 5, the start-up sector might feel a little let down with respect to their clamour for Angel Tax relief.
The Angel Tax levied on start-ups is likely to remain unchanged, said sources according to a report in The Economic Times.
The sources added that the issues surrounding the tax were addressed earlier this year. The government, in February, had relaxed angel tax norms for startups, including increasing the investment limit to Rs 25 crore to avail income tax concessions. Prior to that, the startups could avail tax concessions only if their total investment, including funding from angel investors, did not exceed Rs 10 crore.
What is an Angel Tax?
Section 56(2)(viib) of the Income-tax Act, 1961 (Act) has come to be known as Angel Tax in the recent years in the start-up context. The term is associated with Angel investors - a set of wealthy investors, generally industry veterans who take equity stakes in start-ups and fund them.
What does it state?
When a closely held company issues its shares at a price which is more than its fair market value, the amount received in excess of fair market value will be charged to tax in the hands of the company as income from other sources.
Apart from Angel Tax, Section 68 of the Income Tax Act, 1961 has been a bone of contention for start-ups, private equity and venture capital entities for a while now. Under the section, any sum found credited in the books of an entity without a satisfactory explanation about the nature can be charged to income-tax as the income. The February update didn't do much to change the section.
The government had also tweaked the definition of a start-up from an entity which has been operational for up to seven years from its incorporation or registration to the current limit of 10 years.
"An entity shall be considered as a startup if its turnover for any of the financial year, since its incorporation or registration, has not exceeded Rs 100 crore instead of the existing Rs 25 crore," an official had said back then.
The government had earlier eased certain norms for start-ups and according to the new rules they could directly apply for the tax exemption through the Department of Industrial Policy and Promotion (DIPP). The Central Board of Direct Taxes (CBDT) will then review the application within 45 days.