Amid concerns being raised by budding entrepreneurs on angel tax, the commerce and industry ministry said Thursday that startups need to seek the exemption from an inter-ministerial board set up for the purpose.
Ramesh Abhishek, Secretary in the department of industrial policy and promotion (DIPP), said that the ministry is already taking up the matter with the department of revenue.
Several startups have again raised concerns on taxation of angel funds under Section 56 of the Income Tax Act, which provides for taxation of funds received by an entity.
He said that the purpose of section 56(2)(viib) of Income Tax Act was to prevent money laundering, and investments made by AIF (alternate investment funds) are exempted from this provision.
"For HNIs and other type of individual investors, there was no mechanism earlier. So, DIPP and income tax department put in place a mechanism and set up an inter ministerial board.
"People who would like investments to be exempted from this particular provision under the law, have to apply," he told reporters here.
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The secretary said the department wants more and more startups to apply for tax exemption.
"If specific issues and problems are pointed out to us by startups, we will take that up with the concerned department," the secretary said.
The board, which was set up in 2016, has so far exempted 94 startups from income tax. However, since revision of investment norms in April this year, only two startups have have got exemption.
"We have a mechanism for exempting genuine investments in startups. So, people should use that mechanism. Everything is online, they should take advantage," he said.
When asked about the tax notices being served recently, the secretary said the department would like to see details of those notices.
Startups have to qualify on certain parameters such as Rs 25 crore turnover to get exemption from income tax.
"Registration with the DIPP is as per the eligibility criteria...but that does not qualify any startup to get any exemption from any provision. To get exemption, there is a separate mechanism," Abhsihek said.
Over 14,000 startups have registered so far but all does not get exemption from income tax.
Earlier, when budding entrepreneurs raised concerns over angel tax issues, in April, the government gave relief to startups by allowing them to avail tax concession if total investment, including funding from angel investors, does not exceed Rs 10 crore.
As per a notification, an angel investor picking up stakes in a startup should have a minimum net worth of Rs 2 crore or should have an average returned income of over Rs 25 lakh in the preceding three financial years.
Section 56 of the Income Tax Act provides that where a closely held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be charged to tax the company as income from other sources.
They also enjoy income tax benefit for three out of seven consecutive assessment years.
An angel investor is the one who funds a startup when it is taking baby steps to establish itself in the competitive market.
Normally, about 300-400 startups get angel funding in an year.
The government launched the Startup India initiative in January 2016 to build a strong ecosystem for nurturing innovation and entrepreneurship.