DIPP is considering to giving legal recognition to angel groups, labelling the investments made from these entities as genuine investments in startups.

Relief in sight for Angel investors Govt may provide some exemptions from Angel Tax
Atom Angel Tax Tuesday, February 20, 2018 - 15:25
Written by  S. Mahadevan

There is an air of expectation within the startup community that the government may clear the ambiguity on the issue of angel tax. As things stand now, the Income Tax department has only advised its officials not to put pressure the startups to pay the angel tax. But there are now indications that the government may come up with a fresh notification which may even offer an exemption from the impose, under section 42 of the Companies Act, with some provisos.

According to a report, there are 2 agencies working on this issue; one is Securities and Exchange Board of India, SEBI and the Department of Industrial Policy & Promotion, DIPP. While SEBI has constituted a committee to consider the terms to regulate angel investments and the investors, the DIPP is also working on giving the whole ecosystem of startups and investments in them the correct perspective.

The expectations from the angel investment firms is that the exemptions under Section 42 of the Companies Act and Sections 56 (II) of the Income Tax Act. The issue relates to ‘private placement’ and its definition within this section and unless it is properly worded and redefined, there will either be investors trying to circumvent the provisions or discourage the investors from funding startups, which defeats the very purpose of encouraging them.

The confusion comes from the section that states, â€œno fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company”.

On receiving complaints of harassment, the IT authorities issued a directive insisting that no coercive methods be used to make the startups pay up the amounts raised as demand under this angel tax category. The body representing the stakeholders in this issue, Indian Private Equity and Venture Capital Association (IVCA), has suggested that there may be a definition of a ‘digitally-accredited qualified investor’ or DAQI, that will make it easier for both the investors and the tax authorities to clearly understand that they are indeed genuine and no minimum and maximum investment limits be fixed.

The Narayan Murthy led ‘Alternative Investment Policy Advisory Committee’ (AIPAC) had recommended that a 50% tax exemption on the investment amount. This committee also felt there have to be provisions to prevent the misuse of this exemption by making the promoters or relatives making the investments and claiming the relief.

It is under these circumstances that the startups and the angels are looking forward to a clear definition of the status of the investments and the tax payable on them. However, they have to hope that the 2 Ministries, Finance and Company Affairs can co-ordinate and come up with the right solution soon.