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Union Budget 2019-20: Government eases angel tax norms

Start-ups filing requisite declarations will not be subject to any kind of scrutiny in respect of valuations of share premium

July 05, 2019 09:02 pm | Updated 09:03 pm IST - NEW DELHI

To encourage start-ups in the country, Finance Minister Nirmala Sitharaman on Friday announced a series of measures for the sector, including easing of the much-debated angle tax.

Now, the start-ups who file requisite declarations will not be subject to any kind of scrutiny in respect of valuations of share premiums.

In her speech, Ms. Sitharaman said that start-ups in India are taking firm roots and their continued growth needs to be encouraged “…by releasing entrepreneurial spirits.” The Finance Minister has also proposed to start a television programme within the DD bouquet of channels exclusively for start-ups.

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

Additionally, the issue of establishing identity of the investor and source of his funds will be resolved by putting in place a mechanism of e-verification. “With this, funds raised by start-ups will not require any kind of scrutiny from the Income Tax Department,” she added.

Affects start-ups

Angel tax is applicable to unlisted companies that have raised capital through sale of shares at a value above their fair market value. This excess capital is treated as income and taxed accordingly. This tax predominantly affects start-ups and the angel investments they attract.

In addition, special administrative arrangements shall be made by Central Board of Direct Taxes for pending assessments of start-ups and redressal of their grievances. The Minister said that it will be ensured that no inquiry or verification in such cases can be carried out by the Assessing Officer without obtaining approval of his/her supervisory officer

Pointing out that at present, start-ups are not required to justify fair market value of their shares issued to certain investors, including Category-I Alternative Investment Funds (AIF), the Minister has proposed to extend this benefit to Category-II Alternative Investment Funds also. “Therefore, valuation of shares issued to these funds shall be beyond the scope of income tax scrutiny,” she said. Further, the Minister also proposed to relax some of the conditions for carry forward and set off of losses in the case of start-ups. “I also propose to extend the period of exemption of capital gains arising from sale of residential house for investment in start-ups up to 31.3.2021 and relax certain conditions of this exemption.”

The proposed programme on start-ups, Ms. Sitharaman said, will serve as a platform for promoting start-ups, discussing issues affecting their growth, matchmaking with venture capitalists and for funding and tax planning, the Minister said, adding that the channel will be designed and executed by start-ups themselves. So far, 19,665 start-ups are recognised by the Department for Promotion of Industry and Internal Trade (DPIIT). They are eligible for availing tax and other incentives.

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