Start-ups “registered” with the Department of Promotion of Industry and Internal Trade (DPIIT) are exempt from the “angel tax” extended to them in the Budget, Revenue Secretary Sanjay Malhotra told Business Standard.
He said the tax provision would apply to all forms of foreign resident investors, including those structured as funds and institutional investors.
“Over 80,000 DPIIT-registered start-ups will not come within the tax purview,” he said, adding that “registered” should not be mistaken to be “certified”.
The certified ones will have to pay additional tax.
The Budget proposed extending the angel tax provisions to transactions involving foreign investors. Till now these provisions are applicable only to local resident investors, but the ambit has been expanded as part of the government’s anti-tax avoidance move.
According to the rule, excess premium received on sales of shares by an Indian unlisted company to a foreign investor will be construed as “income from other sources” and taxed.
Malhotra said the Budget addressed the disparity and the loophole in the provision.
“The provision is already there for residents. If local residents invest, there is a tax, so why not tax non-residents? If companies are selling shares at a premium to foreign investors at (a price) over and above the actual price/rate and it makes profit, we are taxing that profit.”
DPIIT Secretary Anurag Jain on Thursday said start-ups recognised by the DPIIT under government’s “Startup India” initiative were eligible for exemption under Section 56(2)(viib) of the I-T Act, commonly known as “angel tax”.
“Section 56(2) (viib) used to have two provisos. One was preferential treatment of foreign players. That has done away with. But there’s no change for start-ups. Start-ups recognised by the DPIIT will not attract angel tax if investment is made in them (by foreign or domestic investors),” Jain said during a post-Budget interaction with reporters.
The Section says if the amount raised by a start-up (during a funding round) is more than its fair market value, it would be deemed income from other sources and taxed at 30 per cent.
The new provision has created nervousness among privately held firms, especially start-ups.
“This proposed amendment would mean that even foreign direct investment (FDI) could be taxed via this Section. Under the Foreign Exchange Management Act, valuation norms prescribe the minimum floor for bringing in FDI,” said Amit Maheshwari, partner, AKM Global.
He added the Income-Tax Department would seek to tax any premium above the fair value. One can expect the department to start examining FDI in start-ups, which will result in litigation.
The angel tax was introduced as an anti-abuse measure in 2012.