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Union Budget 2019: Angel tax issues to be resolved for startups, assures FM Sitharaman

Union Budget 2019: Angel tax issues to be resolved for startups, assures FM Sitharaman

Union Budget 2019: Angel tax issues to be resolved for startups, assures FM Sitharaman
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By Mugdha Variyar  Jul 5, 2019 3:25:54 PM IST (Updated)

Several demands made by entrepreneurs and startup investors were addressed by Finance Minister Nirmala Sitharaman in her maiden Union Budget on Friday.

Several demands made by entrepreneurs and startup investors were addressed by Finance Minister Nirmala Sitharaman in her maiden Union Budget on Friday.

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On the angel tax issue, Sitharaman said that entrepreneurs and investors who file requisite declarations and provide information on returns will not be subjected to scrutiny on the valuation of share premium.
The dreaded Section 56 (2) of the Income Tax Act had come to be known as the angel tax as it counted any investment above the fair market value of shares as income from other sources and taxed accordingly.
The FM also announced steps to make it easier for investors by proposing e-verification for investors and their source of funds.
Sitharaman said funds raised by startups will not need scrutiny by the income tax department and also announced special administrative arrangement by the CBDT for pending cases of assessment of startups and their redressal.
The finance minister also reassured entrepreneurs that no enquiry will be done by an assessing officer (AO) without approval by a supervisory officer, thus removing the discretion that has left startups to the mercy of AOs.
"In principle, the move to resolve angel tax is good. The move to e-verifcation of investors will be helpful, since Section 68 was threatening to become the new angel tax," said Siddarth Pai, an investor at 3one4 Capital.
The minister also announced that the exemptions on funds be extended to Category 2 alternative investment funds ( AIFs), thus there will be no income tax scrutiny for valuations of shares issued by these funds.
The FM also proposed to relax conditions on carrying forward and set off losses that startups face.
Sitharaman also proposed to relax exemption period for capital gains for sale of residential houses for investment in startups till 31/3/2021.
"It is great to see such attention given to startups and specifically angel tax. But we would wait till we see the detailed documents, because we have had many notification in past as well. But happy to see the intent of FM in solving this," said Sreejith Moolayil, founder, True Elements.
Startups had also raised concerns on payment delays to MSMEs, startups and wanted payments from the government within 45 days.
LocalCircles said this was addressed through the announcement to create a platform for payment of bills.
There was also a boost to promote entrepreneurship in rural areas with the Minister proposing to set up 80 livelihood business incubators and 20 tech incubators in 2019-20 to skill as many as 75,000 entrepreneurs in the areas of agro and rural sectors.
Listing of social enterprises was also appreciated.
However, there were some misses, according to industry experts, especially on rationalization of taxation on ESOPs and reducing long-term capital gains tax on unlisted shares.
"Angel tax was covered because it was a hot issue, but there was nothing explicit to promote overall startup investments," said Naganand Doraswamy of IdeaSpring Capital.
"Incentives for corporate investments in startups and ease of doing business in terms of deal closure could have been mentioned," Doraswamy said.
 
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