After the Department of industrial policy and promotion finalizes the changes in the regime, the startups which were incorporated before 2016 and have received a funding of up to Rs. 10 Crore will not have to face the angel tax. This will ease out the conditions for about 300 startups which have received funds from the network of Angel Investors. Startups which were incorporated after 2016 have been recognized to be a part of the startup India policy and will therefore not have to undergo this tax. However, it has also been stated that to examine the startup and its recognition, adequate safeguards will be taken into account.
The then finance minister Pranab Mukherjee introduced the angel tax in the finance bill of 2012. This measure was brought into the light so as to prevent money laundering via high premiums on shares. The tax applies to the capital that is raised by the unlisted companies more than the fair market value of the shares. This income is coming from other sources and should be therefore taxed under Section 56 (II) of the Income Tax Act. However, for those startups which were recognized before the policy was even made, the tax issues are likely to get resolved. The income tax department has asked the concerned officers not to take any action for these startups. Mr. Hasmukh Adhia, the finance secretary has also stated that it is completely wrong to call the levy an angel tax. The valuation of both book value, as well as discounted cash flow, is taken into consideration. In case the valuation is greater than the DCF value, then it is taxed. This is an anti-evasion measure for them. However, no adjustment will be made if the startup is recognized by DIPP.