On the angel tax front, start-ups can now start breathing a little easy with relaxation of taxes. Ongoing efforts of the government have meant that the Income Tax Department has kept small start-ups, which have the Inter-Ministerial Board of Certification approval, away from the angel tax net. This is a huge relief for these small start-ups.
That said, what is this angel tax? When an equity investment is made in closely-held private companies at a premium to the fair price value, the IT department classifies the difference as income from other sources. Moreover, the IT department levies a hefty tax of 30.9% on the difference between the premium and fair price of equity investments. This is what was popularly known an angel tax. It was highly upsetting for the start-ups, which had compelled them to lobby hard with the government for an exemption.
On May 24, 2018, there was a new executive order issued by the Central Board of Direct Taxes (CBDT) in supersession of its June 14, 2016 notification. According to the latest notification, angel tax will not apply to consideration received by a company against issue of shares exceeding the face value of such shares. However, the consideration has to be received for issue of shares from an investor as per the approval granted by the Inter-Ministerial Board of Certification. Moreover, the CBDT stated that the latest notification is deemed effective April 11, 2018.
Following was set as the qualification criteria:
- The aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of shares should not exceed Rs.10 crore.
- The start-up should procure a report from a merchant banker, which clearly specifies the fair market value of shares under the income tax rules.
This CBDT notification comes as a welcome respite for Indian start-ups who were reeling under the impact of the angel tax. This initiative now makes angel funding a cost-effective option for small start-ups in India.