Govt mulls tax concessions for angel-funded start-ups

The Central government is considering giving tax concession, subject to a maximum limit, to start-ups that have received investments from angel investors. The move is aimed at encouraging budding entrepreneurs in the country.

Presently, under the provisions of Section 56(2)(viib) of the I-T Act, when a start-up issues its shares to an angel investor at a price which is higher than the fair market value, the amount received by the company in excess of the fair market value is subject to tax as ‘income from other sources’.

The start-ups had aired their grievances to the government against this provision, which they considered as ‘investor-unfriendly’. Since the angel investor funds the start-up in its early stages when it is struggling to establish itself in a competitive market, the provision to tax the funding received by the start-up discouraged angel investors, who barely put in an average of Rs 2-4 crore per start-up.

In view of this, the Central government has come up with a solution wherein it would set a maximum limit for availing tax concession by the start-ups on investments from angel investors. An inter-ministerial board, under the Department of Industrial Policy and Promotion (DIPP), would certify whether a start-up qualifies for income tax and angel tax exemptions.

This move is in line with Modi government’s aim of promoting start-ups under the ‘Start-up India’ initiative.