Review of angel tax

Review of angel tax

Under Section 56 (2) (7 B) of the Income Tax Act, there will be some relief to many startups and investors by issuing notification making easy relaxation of the exemption criteria from Angel Tax. This rule, effective from April 2016, also casts many objections. The Central Board of Direct Taxes (CBDT) has been asked to assess each application within 45 heydays. This step may be welcomed but some issues need to be resolved.

There is no substantial legal provision regarding the realities related to investment in the startup. Some rules have been relaxed but the method of applying for the exemption is still complicated and the motives of the officers in the matters relating to exemption or demand for taxation go on. The exemption limit is also low as it applies to startup units earning 10 crores. 

There is no room for relaxation in the definition of the investor and the new explanation has also made the silence on the concept of a recent expert committee. This committee can study eligibility conditions for exemption.

Review of angel tax

One problem with Angel Taxes is that it revolves around the 'fair value' of the new business. If the tax officer will feel that the share of the new business has been transferred to more than the 'fair value', then he can demand tax. It is impossible to set reasonable prices for a new unlisted business. There is no old account of any new business and can not be said strictly about the assets, especially when it belongs to the service sector. 

Investors will generally bet on new ventures by assessing the potential for future growth. It is impossible to estimate whether any fixed valuation is strong or not. Under the new process of exemption, the startup unit gives application to the CBDT through the Department of Industrial Policy and Promotion. The department has the exclusive right to make recommendations of the exemption.

There has been speed in the process of application but there is a need to take some additional necessary measures. Investors must be recognized and the startup unit, which seeks the discount, must disclose the origin of the money essentially. Most investors will be shying away from giving such information. So this will be a hindrance and this will give fewer applications for exemption. In the new notification, it has been defined as an investor who has a minimum net worth of Rs 2 crore and has filed return tax at least 50 lakh rupees.

The picture is still blurry over the definition of fair value. Startup and Angel Investor will always find it hard to tell that on what basis they have evaluated a business. This law came into existence to crack down on preventing money laundering through startup masked companies.

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 This objective can be understood but there can not be any norms appropriate to determine the reasonable price to know whether this refinement is occurring or not. The burden of identifying the source of the funds of investors on a legitimate business cannot be justified.

 Greatest startups are valid. This special edition, which was added to the income tax law in 2012, imposes demands on Indian investment by an Indian company in an unlisted Indian company, assuming income on investment above reasonable market value. 

Until this provision remains, till then the qualified investors and entrepreneurs will stray from coming forward. It's time to review it now.