Angel tax — Driving away Angel investors?
Simply put, angel tax is a 30.9 % tax levied on investments made by external investors in startups or companies. To clarify, only the amount which is above the “fair value” of the Company is subject to tax under the head “Income from other sources”. The problem arises because startups are often valued subjectively on the basis of discounted cash flows, without taking into account intangibles like goodwill. This can cause differing interpretations of “fair value” and leave startups vulnerable to unduly high taxes because the taxman feels the investment is too high over their valuation.
Conditions for availing exemption from Angel tax
Now, a startup will be spared this tax if it meets specific conditions. For example, the aggregate amount of paid-up share capital and share premium of the startup after the issue of shares should not exceed Rs 10 crore.
The startup should also obtain a report from a merchant banker specifying fair market value of shares under income-tax rules.
The angel investor should have average returned income of Rs 25 lakh or more for preceding three financial years and net worth of Rs 2 crore or more as on the last date of the preceding financial year.
Applications for certification of startups under Section 56 are to be submitted through online portal to DIPP for consideration of the inter-ministerial board.
Industry said requirement of approval from a merchant banker specifying the fair market value of shares is a big hurdle and paperwork and expenses will rise for those wanting exemption.
While a certification on fair market value is necessary under Company Law, usually companies get it done through a chartered accountant. With a merchant banker, the costs may go up.
A company will enjoy the status of startup up to seven years from the date of incorporation, or up to 10 years if it’s in biotechnology sector. But it will lose its startup tag should its turnover in any year exceed Rs 25 crore.
Information in this blog is intended to provide only a general outline of the subjects covered It should not be regarded as comprehensive or sufficient for making decisions, nor should it be used in place of professional advice.
Nitin Jogad & Associates| Chartered Accountants accept no responsibility for loss arising from any action taken or not taken by anyone using this blog.
