Start-ups hope 'angel tax' will go

Start-ups are hoping the government will tweak the 'angel tax' they need to pay when they raise funds.

Capital raised by an unlisted company from any individual against an issue of shares in excess of the fair market value is taxable as "income from other sources" under Sec 56 (2) of the Income Tax Act.

A start-up raising money from angel investors has to pay 33 per cent of it as tax. If a company requires Rs 5 crore, it actually needs to raise Rs 6.5 crore.

Last year, the Budget had announced a start-up fund of Rs 10,000 crore, but not much is known about how the money was disbursed and to whom.

"Raising initial rounds of funding is hard for any company. The tax creates an unnecessary burden on start-ups," said a co-founder of the Gurgaon-based Rocket Internet.

A sizeable number of start-ups move to foreign countries like Singapore and the UK where taxes are milder.

Shreya Rao of Nisith Desai Associates termed the tax as a major hurdle for start-ups in India. "Not only e-commerce companies, many technology companies find it a big hurdle," she said.

The industry was hoping Finance Minister Arun Jaitley would exempt investments under Rs 10 crore from section 56 (2) of the Income Tax Act, provided these were made by registered angel groups, a source said.

The Securities and Exchange Board of India set out rules in June 2013 that recognised angel funds as a sub-category with a smaller corpus requirement.