Angel tax refers to income tax payable on capital raised by unlisted firms by issuing shares where the share price is considered in excess of the fair market value. The excess realisation is treated as income, and hence taxable under Section 56 (2) (viib) of the Income Tax Act.
The government had earlier exempted companies tagged as startups by Department of Promotion of Industry and Internal Trade (DPIIT). However, many companies which were yet to be considered startups were under IT scrutiny.
"To mitigate genuine difficulties of startups and their investors said that registered startups, it has been decided that section 56 (2) (viib) of the Income Tax Act shall not be applicable to a startup registered with DPIIT," the Minister said.
The government has also decided to set up a dedicated sell under Member of Central Board of Direct Taxes (CBDT) for addressing the problems of startups.
"A startup having any income tax issue can approach the cell for quick resolution of the same," Sitharaman said.
Industry hailed the government decision, terming it good development.
"Exempting startups from the application of the 'angel tax' is a good development. Previously the government has provided this exemption only for investment below a threshold and where only accredited investors were involved. It appears now that the exemption would be cast wider and will cover all 'registered' startups," said Rohinton Sidhwa, Partner, Deloitte India.
( With inputs from IANS )