Government Circular on Angel Tax : Core Issue continues to be unresolved

DIPP (Department of Industrial Policy and Promotion) has published a recent circular tweaking definitions of a startup and angel investors and has defined a process for exemption under Section 56 of Income Tax Act Which startup can approach DIPP for exemption Under Section 56? ●      The company has to be recognised by DIPP as a startup ●      Paid up share capital, should not exceed INR 10 Crores ●      The investor/ proposed investor fulfills either of the following criteria:    ○  Average Income of INR 25 Lakhs for preceding 3 financial years    ○  Networth of INR 2 crores ●      Report from a merchant banker specifying the fair market value of shares ●     The approval will come from an Inter Ministerial Board comprising    ○  Additional Secretary, Department of Industrial Policy and Promotion, Convener    ○   Representative of Ministry of Corporate Affairs, Member    ○   Representative of Ministry of Electronics and Information Technology, Member    ○   Representative of Department of Biotechnology, Member    ○   Representative of Department of Science & Technology, Member    ○   Representative of Central Board of Direct Taxes, Member    ○   Representative of Reserve Bank of India, Member    ○   Representative of Securities and Exchange Board of India, Member Our Take While this circular has increased the total paid up capital and has put a clearer definition around who will qualify as an investor, the key issue is still unresolved of the approval from the Inter Ministerial Board for exemption from “Angel Tax” or Section 56 of Income Tax Act. The process of getting a fair value certification from a Merchant Banker will only add to the compliance costs and time for the startups, who are already juggling with many too many variables in trying to grow their startup. In an environment where investors are taking calls to back startups, which are inherently risky investments with a high mortality rate, this approval process will continue to act as a dampener for the angel investment ecosystem.