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Startups and Angel Investors Can Breathe Easy – Enabling Provisions to Come In



Startups and angel investorsThe finance minister has proposed to exempt angel investments from the purview of the proposed share premium tax on closely held companies which was part of Budget 2012.

FM in his speech on the Finance Bill had stated that: “It has been proposed in the Finance Bill that any consideration received by a closely held company in excess of the fair market value of its shares would be taxable. Considering the concerns raised by ‘angel’ investors who invest in startups companies, I propose to provide an enabling provision in the Income Tax Act for exemption to a notified class of investors.”

“It has been proposed in the finance Bill that any consideration received by a closely held company in excess of the fair market value of its shares would be taxable,” Mukherjee said in Parliament during discussions on the finance Bill. “Considering the concerns raised by angel investors who invest in startups companies, I propose to provide an enabling provision in the Income-Tax Act for exemption to a notified class of investors.”

According to a proposal in the budget announced on 16 March, startups raising money from angel investors were to pay income tax from April on funds they receive, as the government proposed to treat the capital received as income from other sources, if the consideration received for issue of shares exceeds the face value of such shares. The income tax could have been up to 30% and was to be paid by the promoters.

Taxmantra.com had also written on the major damage this proposed tax would cause to the spirit of enterprise across the country, particularly for Startups on our website and also on other popular Startups platforms like yourstory.in .

Eminent organisations such as TiE had suggested other options to the ministry to get around this problem, particularly by creating exemptions for categories of investors, so that the angel investor ecosystem, which powers entrepreneurship in a major way, is not killed by what was being called the ‘ startups ’ tax.

The FM’s statement has come as a major boost to the entrepreneurial space, and it is a good to see that the FM had understood the legitimate concerns of the Startups and angel investors and had proposed an exemption to a notified category of investors.

However, we have to wait for sometime to see, how the exact wordings gets incorporated in the legislation, addressing this issue.

About: 

Alok Patnia founded Taxmantra.com, an expert in tax advisory & compliance. He is a Chartered Accountant having prior exposure with Ernst & Young & KPMG.

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