Start-ups laud Finance Bill amendments, penalty on flouting angel tax norms

Penalty of 200% for not complying with the conditions laid down for availing angel tax exemption

Start-ups and experts welcomed the Centre’s move to encourage only genuine start-ups by introducing an amendment to the Finance Bill, passed by Lok Sabha on Thursday. This includes a penalty of 200 per cent for not complying with the conditions laid down for availing angel tax exemption. 

“The finance minister has assured start-ups that they would be protected from the hassles of angel tax. Earlier, only registered start-ups were given exemption from angel tax. But now, it has been extended to all start-ups submitting the prescribed forms. This is a welcome change and will be of great help to the start-ups. Now, they would have a better focus on their business rather than worrying about taxes,” said Shailendra Naidu, CEO, OBOPAY.

The penalty pertaining to under-reporting of income – introduced through an amendment to the Finance Bill passed by the Lok Sabha on Thursday – is aimed at deterring the misuse of angel tax exemption, allowed in the Budget for FY20. The Bill will now go to the Rajya Sabha, which cannot make changes to it.

“The biggest relief for start-ups was the clarifications regarding angel tax as it had caused much headache to both investors as well as start-ups. Further extension of tax exemptions given under Section 54(g) on capital gains is also welcome step,” said Salman Waris, managing partner at TechLegis Advocates & Solicitors.

The conditions laid down by the Department of Promotion of Industry and Internal Trade (DPIIT) in February required start-ups to have the following conditions: They should not have invested in any unused land, any vehicle over ~10 lakh in value, and in jewellery, among others. Besides, a start-up is not allowed to extend loans and advances.

In case of non-compliance, the Budget has proposed imposition of angel tax on an amount exceeding the face value of shares during the year of non-compliance, with stipulated conditions. 

Now, fair market value will be accounted for. The alternative investment fund (AIF) community also welcomed changes that all subcategories of Category I AIF get an exemption from Section 56. 

“This is a great relief for the AIF ecosystem. The exemption applicable for category I (all subcategories) and category II AIFs (only venture capital undertakings or VCUs) from the purview of Section 56 is a big win and will certainly boost more transactions in this niche. We'd like to thank DPIIT secretary, the Central Board of Direct Taxes as well as the commerce and industry ministries for putting their efforts and on the prompt resolution of the angel tax issue,” said Rajat Tandon, president, Indian Private Equity and Venture Capital Association.