The amendment under discussion seeks to exempt investments not exceeding ` . 10 crore from Section 56 (2) of the Income Tax Act, provided that such investments are made through registered angel groups.
Under the current rule, introduced in Finance Act 2012, capital raised by an unlisted company from any individual against an issue of shares in excess of fair market value would be taxable as `income from other sources’ under Sec 56 (2) of the I-T Act.
“Startups are now liable to pay a 33% tax on any invest ment they receive. In other words, if they need to raise `.2 crore, they will actually have . 3 crore. Hence, they to raise ` will have to dilute ownership by 50% more than they normally would have,“ said Srivastava.
The introduction of the socalled `angel tax’ in the Finance Act 2012 unleashed a backlash from the startup and angel investor community . In June 2013, Sebi formulated rules that would recognise angel funds as a sub-category with a smaller corpus requirement under the Sebi AIF (Alternative Investment Funds) Regulations 2012. Thus, capital raised by startups from Sebi-registered angel funds in approved investee companies, even if above fair market value, would not be taxable.
However, this implies that organised angel groups such as IAN and Mumbai Angels would have to create funds.Currently they just aggregate individual investors and, in each deal, these investors directly invest from their own capital pool and are issued shares in the investee company individually.
The amendments under discussion, if taken on board, would directly benefit organised angel investor networks such as IAN, Mumbai Angels and Hyderabad Angels. IAN is currently the largest organised angel investor network with 350-odd members and more than 60 investments till date. In 2014, such networks, along with high-profile individual angels such as Google India chief Rajan Anandan, iSprit founder Sharad Sharma and AppLabs founder Sashi Reddi, pumped in $115 million into 285 startups, according to data from VCCEdge. This, however, is minuscule compared with the late-stage capital that venture capitalists invested, closing off 2014 with $2.1 billion.
Source : ET