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Proposed tax on Angel Investment by The Finance Ministry, Govt. of India

By Sugandha Dubey on 31 Comments / 2837 views

One, it is challenging enough to turn entrepreneur specially in a new media online space such as photographic content and technology. It involves a lot of mind-space which is constantly pre-occupied with various startup challenges one faces. Regular business operations, changing dynamics and the joy of building all rolled into one.  

I have been through it and to generate funds in a legitimate way via a clean and reliable source is governed by sheer luck and your determination to find the right business partner. I would consider myself very lucky to have found one of the most “generous, intelligent, sensitive and technology savvy ” angel ( who prefers to remain undisclosed at the moment ) in the truest sense of the word ! 

Now coming to the big question that has us worried. There was a proposal of  tax on Angel Investment by The Finance Ministry, Govt. of India, I am unclear if it is passed or has been deferred. It is a killer as for a small business, 30 per cent less money has a huge impact. Typically means impacting cashflow for 6-12 months and more… 

Fresh updates anyone please ? 

I had a chat with Alok on this and he advised that you, my fellow Rodinhooders, are the best guys to seek answers from ! 

Attaching a few links that I read and posted on our blog too.

https://www.thehindubusinessline.com/industry-and-economy/article3874596.ece?homepage=true&ref=wl_home

https://www.indeucapital.com/press/indian-deals/9046-govt-defers-gaar-to-exempt-proposed-tax-on-angel-investment

https://stockimagebank.wordpress.com/2012/09/10/tax-on-angel-investment-what-industry-watchers-say/

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31 Comments

  1. If I remember correctly, it was proposed in the union budget along with GAAR (General Anti Avoidance Rules). As off now, GAAR will mostly likely be deferred to 2016-2017. And as far as the tax on angel investment is concerned, a recent Planning commission committee recommended tax sops for angel investors. so I highly doubt that the government would go ahead with the budget proposal to tax angel investment since it would practically kill the start up scene in India.

    Link to article on tax sops for angel investors – https://articles.economictimes.indiatimes.com/2012-08-28/news/33450293_1_plan-panel-tax-sops-venture-capital-funds

  2. Exactly what I told Sugandha on the phone!!

    Thanks boss

  4. Alok, can you please help me get some clarifications on this please ?

    PFA a copy of the IT ACT 1961
    S 56.

    (The portion on Angel Investing is marked.)

  5. Guys !!! I need help  to get clarity on this issue.
    I had posted a query. Is none of you concerned ???
    I am attaching a doc. that indicates its already passed.
    Is there anyone who can shed some light on this please ? 🙁 

  6. Sugandha while it may have been a part of the most recent finance bill, it has not yet been fully implemented by the tax authorities as far as I am aware.

  8. The doc I have posted is from a valid source. https://indiabudget.nic.in/index.asp and not from a blog or a news agency site. So I feel it supersedes the other links.

    Please correct me if I am wrong. 

  9. Can you post the website link to the document you have attached. I tried looking for it on the India budget site but could not find it. I know you have mentioned that it is from the India budget site but I just want the website link for my reference.

    • Google income tax act 1961 

    • Section 56 Viib

    https://law.incometaxindia.gov.in/DIT/Income-tax-acts.aspx 

    Hope this give you some clarity … 

  11. Extract of FM budget speech dated 7-5-2012 – 

    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. 

    Supplementary Memorandum Explaining the Official Amendments Moved in the Finance Bill, 2012 AS REFLECTED IN THE FINANCE ACT, 2012 – https://bit.ly/RI3RPY

    You will notice that in the document you uploaded as well as in the two links I’ve posted in this reply, it is clearly mentioned that:

    Provided that this clause shall not apply where the consideration for issue of shares is received—

    (i)  by a venture capital undertaking from a venture capital company or a venture capital fund; or

    (ii)  by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

    The class or classes of persons spoken about in point (ii) has not yet been notified by the Government. 

    So coming back to the main topic, I stick to my point that even though it is included in the budget for 2012-13, it has not yet been implemented as it clearly mentions that it will come into force from 1-4-2013. 

    With the new FM speaking about having a re-look at DTC which was supposed to come into effect from 1-4-2013, I doubt that the current provisions such as 56 Viib will be implemented in their current form. 

     

     

  12. Thank you Vinay, Let me share this with our team and get back to you. 🙂 

  13. “(B) after clause (viia), the following shall be inserted with effect from the 1st day of April, 2013,
    namely:—”

    The said clause will be applicable from the financial year 2013-14 onwards.

    Also, there is an exemption provided on funds raised from venture capital fund / company. To avail the same, one needs to be recognized as a venture capital company in the eyes of law. Angel investors aren’t really the same.

    Also, one should pay special emphasis on two phrases under the clause:

    “…substantially interested, receives, in any previous year, from any person being a resident, any…”

    Hence, only funds received from Indian residents would be subject to this provision.

    “…any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:”

    So, only the amount received in excess of the value of those shares will be subject to tax. And value is a subjective word. 😉

  14. Sugandha – not sure if you got the clarity – here it is nevertheless:

    if you read the clause carefully ” (ii) by a company from a class or classes of persons as may be notified by the central government in this behalf” – this was inserted after all the protests and representations to CBDT.

    Trouble is that the notification has still not happened and hence the suspense of criteria to classify angels continue continues.

    I can say with reasonable certainty that this is not applicable at this time.

    You might want to read two news article to get the perspective :

    https://bit.ly/kk-startuptax
    &
    https://bit.ly/kk-startuptax1

  15. Thank you Kanchan, will read and revert 🙂 

  16. Thank you all, but contrary to all your comments and speculations that is is not endorsed yet, let me confirm that it is law and enforced.
    We have checked it & verified it as we are impacted !

    Unfortunate but true as of now ! Its a killer !

  17. Sugandha,

    Would you be able to send me more details about this – I might be able to help.

    I am sending my contact details to you.

  18. How is that possible? The provision clearly says “… the following shall be inserted with effect from the 1st day of April, 2013,“

    This cant be the assessment year.

  19. :-))

  20. y :)) Alok ? 

  21. Coz u r insisting on something that doesn’t exist!!!

  22. Followed by ( Viib ).. where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident , any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares : …. ( read the attachment I have inserted already) 

  23. Hi Kanchan, Good to connect. I am a Delhi TIE member and TIE annual partner too 🙂 What would you want me to send you ? 

  24. baba, my Angel investor has been advised by the most renowned tax consultants. 

  25. The focus should be on bringing back black money, rather than putting tax on each and every new opportunity. More regulation and safety for Angel Investors is understandable but taxing may not be wise. In any case angel investors have to pay tax on the income earned as per their personal income tax slab, which should be sufficient. These are my views….welcome other comments/views too.

  26. Precisely the angst of genuine Angels. Anyway they are doing it more to encourage smaller capital requirements ( below 5 crs). 

    Its not worth their time or energy.
    It will only deter the genuine one’s not to do so, thus reducing opportunity for an entrepreneur. 

    On the other hand the one’s who govt. is trying to nab will find another route ! 

    I am surprised such ” highly intellectual economist” have such dull visions ! 

  27. My apologies. The said provision is applicable from financial year 2011-12 onwards. W.e.f 1-4-2013 refers to the assessment year.

  28. Thank you Nishant for confirming.
    Yes, we got it checked by some senior tax consultants and were advised that it is applicable. !

  29. Hi Alok, 

    Nishant also agrees now, that I was not insisting on something that did not exist. 

    This brings me to the main point of starting this discussion that the government is clearly not interested in genuine entrepreneurship or understands the many challenges of small entities. 

  30. This new provision is a cause for concern. It’s a bold step primarily aimed to block the funneling of unaccounted money into the business ecosystem. Yes, this provision will fulfill the purpose to some extent. But what about the genuine cases? They are the ones who suffer.

    For now, one has the following options:

    1. Get the investment vehicle registered as a Venture Capital Company / Fund with SEBI.
    2. Raise angel funding from a non-resident.

    The provision says that the amount in excess of the value of shares is taxable. Value is a subjective word. So, 

    3. Get a good lawyer / CA

  31. I wrote a long set of posts and compiled them into an e-book about this:

    https://capitalmind.in/2012/03/free-e-book-the-startup-tax/

    (see all posts here)

    Also, it seems the FM haspromised some relief to “angels” but the notification hasn’t yet come (AFAIK)

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