Angel tax will not be levied for start-ups registered with DPIIT, Finance Minister Nirmala Sitharaman announced on August 23. She also said that a dedicated cell led by members of Central Board of Direct Taxes (CBDT) will be set up for addressing the income tax-related problems faced by start-ups. The government also withdrew enhanced surcharge on foreign portfolio investors (FPIs) that was levied during Union Budget 2019.

Angel tax was introduced in 2012 by the then Finance Minister Pranab Mukherjee to restrict money laundering of the funds under Section 56(2)(viib) of the Income Tax Act, 1961. It is the income tax payable on capital raised by privately held companies when the share price offered seemingly exceeds the fair market value of the shares. Such premium is considered to be the income of the company and is thus taxable under the section.

Govt withdraws ‘enhanced surcharge’ on FPIs, issues of IT summons to be centralised

While addressing the media, Sitharaman announced several other measures apart from removal of angel tax to boost the Indian economy:
  • Withdrawal of enhanced surcharge on foreign portfolio investors (FPIs) which was levied during the Union Budget 2019
  • Withdrawal of surcharge on long- and short-term capital gains from the transfer of equity shares (had been levied in Union Budget 2019)
  • Centralisation of issuance of IT summons; old notices issued till now need to be cleared in 1.5 months from August 23
  • Randomisation of tax scrutiny from Vijay Dashami day (October 8) and simplification of filing returns
  • Pending GST refund due to Ministry of Micro, Small and Medium Enterprises to be paid within 30 days; henceforth, all refunds will be done in 60 days. “The Trade Receivable Discounting System (TReDs) will use the GST Network system. Uniform definition of MSMEs is also being considered,” Sitharaman said.
  • Loan applications of customers will be tracked online to avoid harassment and ensure transparency. Loan documents must be returned in 15 days of loan closure.
  • BS-IV vehicles purchased till March 31, 2020, will remain operational until the period of registration.

Angel tax notices were sent to start-ups despite norms

In April 2018, the government had issued a notification exempting investments of up to ₹10 crore from the tax (for start-ups). Additionally, the exemption applied only when the angel investor had a minimum net worth of ₹2 crore or an average income of over ₹25 lakh in the preceding 3 financial years.

Despite that, in December 2018, around 25 start-ups and some angel investors were served with notices from the CBDT to pay up taxes on angel funding they raised years ago. The CBDT had then said that it was examining angel tax, and that no coercive action related to it would be taken until an expert panel resolved the issue.