The government is considering setting a limit for availing tax concession by start-ups on investments from angel investors, a government official said. The move could help promote budding entrepreneurs in the country.
Several start-ups have raised concerns related to taxation of angel funds under the Section 56 of the Income Tax Act, which provides for taxation of funds received by an entity. As many as 18 start-ups have got notices from tax authorities.
“The idea is not to tax risky investments. So we are trying to make a mechanism for that. We will be coming out with a notification soon on this and another notification will be issued by the IT department,” the official said.
Start-ups in the recent past had flagged their grievances to the government regarding angel tax provision, which, they considered, was not friendly to them.
An angel investor is the one who funds a start-up when it is taking baby steps to establish itself in the competitive market economy. An angel investor normally puts in Rs 2 to 4 crore only.
The government is also mulling to extend these benefits with retrospective effect to certain start-ups, the official added.
These instances are dealt under section 56(2)(viib) of the I-T Act.
It provides that where a closely held company issues its shares at a price which is 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.
According to the deliberations, the inter-ministerial board, under the department of industrial policy and promotion, would certify a start-up whether it is eligible for income tax and angel tax exemptions.
Normally about 300 to 400 start-ups get angel funding in a year.
Earlier, Central Board of Direct Taxes has directed the taxman not to undertake coercive steps in recovering pending taxes from start-ups under a specific provision of the Income Tax Act.