The Angel Tax (Section 56(2)(viib) of IT Act) – Regulates funding taxation.

The Angel Tax, as defined under Section 56(2)(viib) of the Indian Income Tax Act, has been a subject of debate and concern among the startup community and investors in India. This provision was introduced to prevent money laundering and curb the inflow of unaccounted funds under the garb of share capital. However, its application to startups receiving funding from angel investors has raised various issues and challenges.

Under the Angel Tax provision, any excess consideration received by a startup for issuing shares above the fair market value is treated as income and taxed as per the prevailing tax rates. This has led to situations where startups have been taxed on the investments received from angel investors, even when the investors are genuine and there is a valid business rationale for the valuation.

The implementation of Section 56(2)(viib) has caused significant distress among startups as it has resulted in genuine investments being questioned and taxed, causing undue financial burden and administrative hassles. This has adversely impacted the growth and investment climate for startups in India, which heavily rely on external funding to fuel their growth and innovation.

Recognizing the concerns raised by the startup ecosystem, the Indian government has taken various steps to address the issues related to the Angel Tax. In February 2019, the government announced certain exemptions and relaxations for startups registered under the Department for Promotion of Industry and Internal Trade (DPIIT).

As per the revised guidelines, startups meeting the criteria specified by DPIIT are exempted from the Angel Tax provisions subject to certain conditions. These conditions include the requirement of a certified valuation report, the utilization of the funds for the specified business activities, and the approval from an inter-ministerial board set up for this purpose.

The amendments to the Angel Tax rules have provided some relief to startups, but there is still a need for further clarity and simplification of the provisions to ensure a conducive environment for startup funding in India. The government has also been working on revising the startup policy and laws to create a more supportive framework for startups and investors.

In conclusion, the Angel Tax provision under Section 56(2)(viib) of the Indian IT Act has been a contentious issue impacting the startup ecosystem in India. While the recent reforms and exemptions have been a step in the right direction, there is a need for continuous dialogue and collaboration between stakeholders to address the challenges and foster a thriving environment for startups in the country.