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Have taken up 'angel tax' issue of startups with FinMin: Prabhu

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Dion Global

20 Dec 2018

The commerce and industry ministry has taken up the issue of 'angel tax' notices being sent to startups with the finance ministry, Union Minister Suresh Prabhu has said.

Several startups have raised concerns on taxation of angel funds under Section 56 of the Income Tax Act, which provides for taxation of funds received by an entity.

"We have taken up the issue," the commerce and industry minister said in a tweet.

He said this in response to a tweet by Chairman of Manipal Global Education T V Mohandas Pai, who has sought "urgent" intervention by the government in the matter.

An income tax official said, "Notices issued on angel tax to startups may be for those that are not recognised by the Department of Industrial Policy and Promotion (DIPP)".

Later in the day, the DIPP in a statement said that it has again taken up this matter of IT notices with the Department of Revenue so that there is no harassment of angel investors or startups.

"Government is committed to protecting bona fide investments into start-ups," it said.

It said that the department in consultation with the revenue department has put in place a mechanism since April to grant exemption from the provisions of Section 56(2)(viib) of the Income Tax Act to genuine investors in recognised startups.

Earlier in April, the government gave relief to startups by allowing them to avail tax concession if total investment, including funding from angel investors, does not exceed Rs 10 crore.

As per a notification by the commerce and industry ministry, an angel investor picking up stakes in a startup should have a minimum net worth of Rs 2 crore or should have an average returned income of over Rs 25 lakh in the preceding three financial years.

Section 56 of the Income Tax Act provides that where a closely held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be charged to tax the company as income from other sources.

Startups also enjoy income tax benefit for three out of seven consecutive assessment years.

To avail the concessions, startups would have to approach an eight-member inter-ministerial board of certification.

An angel investor is the one who funds a startup when it is taking baby steps to establish itself in the competitive market.

Normally, about 300-400 startups get angel funding in an year.

The government launched the Startup India initiative in January 2016 to build a strong ecosystem for nurturing innovation and entrepreneurship.