Suresh Prabhu assures start-ups a solution to angel tax soon

Union commerce minister Suresh Prabhu said the government will soon come up with a solution to address the problems being faced by start-ups with regard to angel tax. Several start-ups have raised concerns over levying taxes on angel funds under Section 56 of the Income Tax Act, which provides for taxation of such money received by an entity.

Prabhu acknowledged that start-ups are facing some difficulties due to the angel tax and he has taken up the issue with the finance ministry. “I want to assure you that we are working with the finance ministry in order to find the appropriate solution to angel tax and I am quite confident that we will come up with a solution soon,” he said while addressing an awards function. An angel investor is the one who funds a start-up when it is taking baby steps to establish itself in the competitive market. About 300-400 start-ups get angel funding in an year. In April, the government gave relief to start-ups by allowing them to avail tax concession if total investment, including funding from angel investors, does not exceed Rs 10 crore. As per a notification by the commerce and industry ministry, an angel investor picking up stakes in a start-up should have a minimum net worth of Rs 2 cr or should have an average returned income of over Rs 25 lakh in the preceding three financial years.

Section 56 of the Income Tax Act provides that where a closely held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be charged to tax the company as income from other sources.

Start-ups also enjoy income taxbenefit for three out of seven consecutive assessment years.

To avail the concessions, start-ups would have to approach an 8-member inter-ministerial board of certification.