Terming the recent notification on exempting investments in start-ups from angel tax as a step in the right direction, the Indian IT industry apex body Nasscom on Friday said the issue (angel tax) had been contentious as it was impacting the growth of the emerging ecosystem and in ease of doing business.
"The Department of Industrial Policy and Promotion (DIPP) notification on January 16 on easing process for start-ups to avail safe harbour (regulatory provision) from angel tax under section 56 (2) (viib) of the Income Tax Act, 1961 is a step in the right direction," Nasscom told IANS in a statement from New Delhi.
Angel tax is levied on premium paid on investments in start-ups and unlisted firms to curb "laundering" under the Income Tax Act 1961, as their valuations increase despite stagnant or declining revenues.
The Income Tax sleuths have raised concerns over premium paid on shares of startups at valuation that were not commensurate with their revenue growth. A premium higher than the fair market value is considered other income, which is taxable under the angel tax.
The amount raised at a premium in excess of the fair value is taxed at 30.9 per cent under the Income Tax Act, 1961.
The notification allows start-ups recognised by the DIPP to apply for exemption from angel tax on share capital received up to Rs 10-crore.
"The notification also removes the inter-ministerial board approval and replaces it with nod from the Central Board of Direct Taxes (CBDT) in 45 days, quickening the approval process for startups," the National Association of Software and Services Companies (Nasscom) said in the statement.
The industry body, however, said the angel tax remains an issue for the overall growth of the startup ecosystem and the ease of doing business.
"Nasscom had already raised concerns towards the abolition of angel tax provisions to boost investments in startup ecosystem," noted the statement.
The present system of angel tax is "flawed" in its approach with focus on valuation of startups as a means to verify the genuineness of transaction, Nasscom pointed out.
"Even though the intent seems to be good, the process involved is cumbersome and time-consuming," the tech body said in the statement.
Meanwhile, the DIPP has invited suggestions to implement the exemptions.
"Suggestions are invited for better implementation of the recently announced angel tax exemption framework," DIPP said in a tweet on Thursday.
The DIPP is also expected to meet with startups and investors early February to discuss implementation issues.
The Indian Angel Network (IAN), a network of angel investors, however, said the angel tax continued to "strangulate" startups.
"While this step (notification) is in the right direction, we believe the real solution is to revisit the section 56 of the Income Tax Act) as these carve outs cause administrative overheads and time delays that deter many angel investors," IAN said in a statement.
"The angel tax is killing the future of India as talent, money and value were moving out to other countries, it reiterated.