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DPIIT Sees No Good in Angel Tax, Seeks Its End

Ahead of the budget, the Department for Promotion of Industry and Internal Trade (DPIIT) has made a pitch to scrap the so called angel tax for startups, secretary Rajesh Kumar Singh said Thursday. He said the department has also proposed phasing out inverted duty structure and high tariff on inputs in sectors such as electronics. “Based on consultations with the startup ecosystem, we had recommended that in the past as well. We have recommended this time also,” Singh said. The budget is expected later this month. Section 56(2) VII B of the Income Tax Act was introduced in 2012 as an anti-abuse measure aimed at tax avoidance and curbing money laundering through inflated valuations. Under this provision, if a closely held company issues shares at a price exceeding fair market value (FMV), computed in accordance with prescribed methodology, the difference is to be taxed as income from other sources.

This will be levied at the applicable 30% corporate tax rate. This provision hit angel investment in startups the most, resulting in the informal title. The Finance Act 2023 proposed to extend the angel tax provisions to non-resident investors from April 1, 2024.

The finance ministry has tried to address concerns over the tax while the industry has repeatedly lobbied for removal of the section on grounds that this would aid capital formation.

“Ultimately, the integrated view will be taken by the finance ministry on angel tax,” Singh said. “It’s just an input from our side. We have done it several times.”The department has passed on written inputs from industry associations to the finance ministry, he said. There are about 100,000 DPIIT-registered startups in the country.

Various industry associations have also raised the issue of lowering customs duties on inputs.

“I tend to agree with them that taxes on inputs should be reduced over time,” said Singh. “DPIIT’s view is that inverted duty and high tariff on inputs will need to be phased out — not only in electronics but perhaps in other sectors. “Ultimately, it’s for the ministry of electronics and information technology and the finance ministry to take a view, he said.

S-ET Image Source: Google

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