Goodbye Angel Tax

While the global economy including India is facing a slowdown, Finance Minister of India, Smt. Nirmala Sitharaman announced some measures to boost the current position of the Indian economy and also assured that some more reforms are also on the cards which are supposed to be announced in the next week and the week after.Yellow and Black Snack Bar Logo (1)

In the press conference held on 23rd August 2019, the Finance Minister announced several measures starting from the infusion of Rs.70000 Cr in the banks to increase liquidity, faster GST refunds, IT summons to be sent through centralized system, CSR violations not to be treated as a criminal offence, apart from withdrawal of some other provisions which were introduced in the recently held Union Budget in July 2019, in addition to the withdrawal of Angel Tax which had been in the limelight for some time now with startup community touting it as an unfair tax burden affecting young companies and entrepreneurs.

The startup industry stood up to cheer when the figment concept of Angel Tax was removed by the Finance Minister. She said, “Section 56(2)(viib) of the Income Tax Act shall not apply to startups registered with the commerce ministry”. Thus, any startup which has been registered under the Department of Promotion of Industry and Internal Trade (DPIIT) will be exempted from Angel Tax.

Section 56(2)(viib) of the Income Tax Act gave power to the IT department to treat excess securities premium as income in the book of accounts of a closely held company and the company had to pay income tax on the same. The provision was introduced in the Income Tax Act vide the Finance Act 2012 seeking to stop shell companies who used to create capital out of nowhere without any real value in the company.

This move of exempting the registered startups from Section 56(2)(viib) of the Income Tax Act is certainly going to boost the morale of the investors and entrepreneurs. Although, a number of measures and announcements were also made earlier on Angel Tax, but in the press conference of 23rd August 2019, the government made it more clear, simple, and straight forward, removing all ambiguities and confusions around it which shall go a long way in developing the startup and MSME ecosystem in the country. Further, the Finance Minister also added that a separate dedicated cell shall be housed under the Central Board of Direct Taxes (CBDT) for addressing the problems of startups; any startups having problem with income tax can approach the cell.

Despite the changes announced by the government, there are still many voices who feel that the benefit should not only be extended to registered startups under DPIIT but also to other companies who have probably not raised funds from any Angel Investors or Venture Capital but from the friends and family.

However, by and large, it is undeniable that a long-term issue hitting the startups and growing businesses have been addressed wisely and prudently to improve the economic condition of India and also pave way for the entrepreneurs to set up in India, Make in India, and do business in India. And, it remains to be seen if the exemption is also going to be extended to other companies who are not registered as startups and what other measures are taken by the government to further boost the entrepreneurial ecosystem.


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