Recently, the Indian Government proposed changes in tax rules for investments made in start-up and entrepreneurial ventures. A 30.9% tax levied on investments, however it is important to mention that the entire investment is not taxed, only the amount that is considered to be above ‘fair value’ valuations of a start-up; also classified as ‘income from other sources’ in Section 56 (ii) of the Income Tax Act.
Why the sudden uproar?
Typically start-ups are based on offering a product or a service which is path-breaking and solves a problem creatively. Often valued subjectively on the basis of discounted cash flows, without taking into account intangibles like goodwill, it can create radically differing interpretations of ‘fair value’ and leave start-ups in a lurch.
The drastically high tax charged on the excess amount can discourage investors to invest in start-ups and can lead to a decrease in innovative business ventures. It’s important to remember that angel tax is levied only on those start-ups that aren’t registered with DIPP. If your start-up is registered with the DIPP, you will not be served with this notice and will be exempt from the payment of angel tax.
Mr. Shailendra Mishra, Director at ASC Group has explained the concept, the background and the implications of the tax in this video:
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