In a major relief for the budding entrepreneurs and investors, the finance minister Nirmala Sitharaman during her Budget 2019 speech announced exemption of scrutiny for Angel tax for Startups and investors who have filed their returns.
Finance Minister N Sitharaman said, “To resolve angel tax issue, startups who file requisite declarations will not be subjected to scrutiny in valuation.”
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One of the most dreadful issues faced by new entrepreneurs pertains to Angel Tax. Angel Tax is a 30% tax that is levied on the funding secured by startups from an external investor. However, this 30% tax is imposed when startups obtain angel funding at a valuation higher than its ‘fair market value’. It is considered as income to the company and therefore taxed. Angel Tax was first introduced in 2012, with the purpose of keeping money laundering in check.
Angel Tax had suddenly made a reappearance last year when several startups reportedly received notices from the I-T department demanding them to clear their taxes on the angel funding they raised, and in some cases, exacting a fine for not paying Angel Tax.
The bone of contention for many new-age entrepreneurs had been the issue of “fair market value”. Entrepreneurs argued that there were no objective means to measure a company’s “fair market value”. According to them, investors pay them a premium for the concept and the business potential at the initial stage, hoping that the idea would take the market by storm and astronomically increase their valuation. However, tax officials appear to be evaluating the value of the startups based on their net asset value at one point.
With this move, finance minister Nirmala Sitharaman seeks to develop a conducive environment for the startups to proliferate, unencumbered from the tyranny of Angel Tax. She has placed special emphasis on reviving the entrepreneurial spirit amongst the youth in the country by announcing several other beneficial moves such as launching a special channel for startups, designed and executed by the startups and promote the entrepreneurial culture.