The Government of India has been working towards easing the angel tax burden on startups and investors. On the other hand, there are many shell companies that are using these provisions to launder money.
The government is now on a mission to make sure that only genuine companies receive the benefits of angel tax relaxation. Similarly, if any startup fails to comply with the rules, a penalty of up to 200% will be levied.
The Lok Sabha has passed the latest amendment to the Finance Bill on 18 July 2019. Under Section 56 (2) (vii), any startup that does not comply with the government’s rules to get angel tax exemption must pay a penalty of 200%.
This penalty aims at preventing the misuse of the angel tax exemption as announced in the Budget FY20. The bill will be introduced in the Rajya Sabha shortly; however, no changes can be made to the bill anymore.
The Department of Promotion of Industry and Internal Trade (DPIIT) has proposed 2 conditions the startups must adhere to:
- Startups must attest that they have not invested in unused land, jewellery, vehicles over Rs.10 lakh in value, and so on.
- Startups do not have the authority to give loans and advances.
Piyush Goyal, Minister of Commerce and Industry has stated that the Central Board of Direct Taxes (CBDT) has exempted about 702 startups under Section 56 (2) (vii) of the Income Tax Act, 1961 until 21 June 2019.
The eligibility for a startup to receive the exemption was mentioned in a notice issued by DPIIT on 19 February 2019. It states that all startups can receive angel tax exemption regardless of their share premium values. However, the aggregate amount of paid-up share capital and share premium of the startup after issue or proposed issue of shares, if any, must be within Rs.25 crore.
Accordingly, the Finance Minister Nirmala Sitharaman said during her maiden Budget that the startups and investors who file declarations and returns will not be subjected to any scrutiny with respect to the valuation of share premiums. The government is planning a way to e-verify the identity of investors and their source of funds. Further, the funds raised by startups will not need any scrutiny from the IT department.