'Angel tax' exemption: Will this give Modi's 'Startup India' mission a push?

The Central Board of Direct Taxes (CBDT) on Sunday notified the much awaited tax exemption on investments above fair market rate for startups.

The effect of the CBDT's notification is that in case a startup gets investment from resident angel investors, family offices or funds which were not registered as venture capital funds, it will not be taxed even if the investment is made in excess to the fair value.

Who are Angel investors?

Like the word suggests, 'Angel investor' is among an entrepreneur's family and friends who invest or injects money in small startups. 

The angel investor can be a one-time investor who will help giving a push to the business/startup during its difficult early stages, said an Investopedia report.

To become an angel investor, one must have a minimum net worth of $1 million and an annual income of $200,000, the report added.

What is Angel Tax?

Presently, funds raised by angel investors or any unlisted company via equity is taxed making the amount in excess to the fair value. As per Section 56 (2) of Income Tax, this excess amount is considered as "income from other sources", said an Economic Times report. 

So, the total tax of over 30% is applied. A similar exemption already exists for Venture Capital Funds (VCFs).

Will CBDT's decision give 'Startup India' mission a push?

In January, Prime Minister Narendra Modi had unveiled a slew of incentives to boost startup businesses, offering them a tax holiday and inspector raj-free regime for three years, capital gains tax exemption and Rs 10,000 crore corpus to fund them.

Since then, the startups have been waiting for this move. Why?

Because, now the startups can issue shares to investors at higher than fair value without worrying about any tax consequences, explains Rajesh H Gandhi, Partner, Deloitte Haskins and Sells LLP.

But, Amit Maheshwari, Partner Ashok Maheshwary and Associates LLP, told PTI that, "this Angel tax still poses threat to earlier investments which could be perceived as being overvalued in light of the declining valuations globally and in India"