Govt asks angel investors to get certified as group for enjoying tax waiver

MoS for Finance Jayant Sinha said Sebi was empowered to waive tax for defined groups

Investors could form a group that could with certification by the Securities and Exchange Board of India (Sebi) gain a waiver from the angel tax, Minister of State for Finance Jayant Sinha had suggested.

He said this in response to the start-up community’s displeasure over the Union Budget not resolving the angel tax issue. Section 56 of the Income-Tax Act taxes startups on investments they receive from angel investors if these are above the fair market value.

Sinha said the Sebi was empowered to waive the tax for defined groups. Angel investors can register as a collective and avail of the exemption if they meet required criteria. However, Sinha defended the government position that it was difficult to “police” individual investors.

Representatives of the industry said they were studying the minister’s recommendation. Angel funds recognised by the Sebi are exempted from this tax under the alternative investment fund category. However, the criteria to qualify as an angel fund are stringent.

The tax was introduced by the Finance Act, 2012, and is levied on start-ups that receive funding, based on the perceived difference in valuation of the company. If the perceived difference is 25 per cent and the invested amount is Rs 1 crore, the tax levied will be at the rate of 30 per cent on Rs 25 lakh.

Padmaja Ruparel, president of the Indian Angel Network, said since start-ups were unlisted companies, their potential would be a matter of judgment. “The issue with this tax is money which could have gone into building the company is now going as tax,” she added.

“It is not as if the future of the startup ecosystem rests on it (a tax exemption),” said Sharad Sharma, co-founder of software industry think-tank iSpirit. “The government is evolving standard guidelines on this issue, which should address concerns,” he added.

IT industry body Nasscom has recommended “know your investor” norms to dispel concerns of money laundering. “Sinha’s suggestion is on the lines of what we had recommended on forming a certified list,” said Bishakha Bhattacharya, director, government relations and public policy, Nasscom.