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Startup Tax: Diluted To Allow "Angels"?


The FM, in his remarks while introducing the Finance Bill today, provided some relief to the startup community by potentially allowing angel investments to not attract the Startup tax.

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It has been proposed in the Finance Bill that any consideration received by a closely held
company in excess of the fair market value  of its shares would be taxable.  Considering the
concerns raised by "angel" investors who invest in start-up companies, I propose to provide an enabling provision in the Income Tax Act for exemption to a notified class of investors

Let’s not rejoice too early. We don’t know what the enabling provision is, just  yet. I will post when I find out (and please, do let me know if you do!).

An angel investor isn’t a specified class anywhere in any act. The only specific kinds of investor entities are a) Venture Capital Funds or b) Private Equity Funds. Other forms include large institutions like Mutual Funds, Insurers, Pension Funds etc. The concept of an "Angel" is just an individual that invests in a company at the early stage. So I would expect the definition to include equity fund infusions into companies, by individuals, below a threshold limit (say Rs. 10 crore).

Of course, this does create other problems, like what about private equity funds or insurers or other investors investing large sums of money into companies. (Nowadays, e-commerce shops easily raise $15 million) But there are proper venture funds investing here, and these are exempt from the Startup Tax implications.

But this is great news in that the Startup Community has managed to get the FM’s ear. Some people have told me I was the first to break this news, and that makes me feel good. What matters, though, is that this has found the ears of the powers that be, and I hope this issue gets resolved soon.


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