Finance Act 2012, introduced a new sub section (2) (vii b) in Section 56, ‘Income from other Sources’. It declared that following incomes shall be chargeable to income-tax under the head ‘Income from other sources’, namely:
- A company in which the public are not substantially interested,
- Receives from a resident,
- Consideration in excess of fair market value,
- This shall not apply to funds received by a Venture capital undertaking from a venture capital company or fund, and these are also incorporated in India.
- Also, this assesse company should be registered under DPIIT (Department for Promotion of Industry and Internal Trade).
It is called Angel Tax, as the initial investors were looked at as Angel’s who risked their capital or believed in the start-up story and were willing to invest. The start-up wanted a premium for the idea and for a projected success story.
Any start up registered under DPIIT that receives a share premium from a local resident is punishable under ‘Make in India’? Funds received from foreign sources are not to be questioned. Considering that this was to plugin loopholes for political funds being laundered through share premium account, it was only for funds parked in India (read Jaganmohan Reddy!)
This premium was ‘suspect’ in the eyes of the tax man! Hence a tax of 30%!
In February 2019, this exemption on taxing the premium was confirmed, subject to the condition that, these start-ups do not invest for seven years in the negative list. The list? Land, Building, Motor Vehicle, Aircraft, Yatch, Jewellery, other than in ‘ordinary course of business’. However, the problem lies in: Loans and Advances, Share & Securities and Capital Contribution.
The irony is that even staff loans/ advances, rent deposit/advances, advance to vendors etc are now not allowed. A start-up cannot even consider Merger & Acquisition or diversification or then a simple Joint Venture, as it amount to investment in shares!
The Income Tax Act under section 80IAC, allows a 100% deduction of profit for three out of seven years from the year of incorporation. This is limited to start-ups with a turnover not exceeding Rs. 250 Million or Rs 25 Crores. This section has its own conditions and these ALSO need to be fulfilled.
Now comes the Companies Act amendment that allows for issue of shares with differential voting rights (DVR). The earlier conditions of three years or profits have also been done away with. This will have its own consequences.
The Angel Tax works on the traditional Indian concept of parental control. Thou shall marry the spouse your parent chooses and thou shall conceive when thou parents decide! So if you want to grow, expand, fly and compete, then it is not acceptable.
Finally, the Central Board of Direct Taxes (CBDT) has set up Income Tax Appellate Tribunal and issued consolidated circular reiterating clarifications issued so far on taxation issues hurting start-ups, including the so-called angel tax.
“It has been reiterated time and again by CBDT that outstanding income-tax demand relating to additions made under section 56 (2) (viib) would not be pursued and no communication in respect of outstanding demand would be made with the Start-up entity,” said the CBDT.
It further said that any other income tax demand would not be pursued against start-ups unless the demand is confirmed by the Income Tax Appellate Tribunal.
