Centre has set up a five-member working committee to look into revising the norms of the angel tax imposed on start-ups.
Angel tax is a term used to refer to the income tax payable on capital raised by unlisted companies via issue of shares where the share price is seen in excess of the fair market value of the shares sold.
Income Tax department has introduced tax in 2012, fearing startups can be used as a convenient tool for money laundering.
Under the Act, the IT department is free to arbitrarily decide the fair value of a company’s share and tax start-ups if the price at which their new shares are sold to investors is higher than the fair value of these shares.
It has been argued the Angel tax may justifiable but arbitrary nature of it may cost unintended consequences because Section 56(2)(viib) of the Indian Income Tax Act, 1961 gives income tax officials a free hand to harass even genuine start-ups and may hinder their growth.
Government must understand the significance of startups in the country and should look forward to withdraw the angel tax and focus instead on capacity building to better identify illegal wealth.