Economy

Nirmala Sitharaman says angel tax will not apply to startups registered with DPIIT. Here's what Section 56 2 vii(b) means

Updated : August 23, 2019 07:40 PM IST

Finance Minister Nirmala Sitharaman today said that Section 56 (2) (vii b) of the Income Tax Act, which had come to be known as the angel tax, will not apply to startups registered with DPIIT. Section 56 2 vii(b) counted any investment above the fair market value of shares as income from other sources and was taxes accordingly.

"To mitigate genuine difficulties of startups and their investors, it has been decided that Section 56(2)(b) of the Income Tax Act shall not be applicable to a startup registered with the DPIIT," she said.

It has also been decided that a dedicated cell will be setup under a member of the CBDT for addressing the problems of startups. A startup having any income tax issue can approach the cell for quick resolution of their problems, she further added.

Angel tax has been a big headache for entrepreneurs and in the startup ecosystem. Although the government earlier announced some measures, but it was not suffice for the startups as they wanted a complete revocation of the tax liability.

The “Angel Tax”, or Section 56(2)(vii b), is a 2012 insertion which says that if a privately held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be taxed as income from other sources.

In November 2018, Ministry of Consumer Affairs (MCA) had to issue notices to more than 2,000 startups that had raised money since 2013 due to this provision.

Follow our complete coverage of measures announced by finance minister Nirmala Sitharaman here.