Startup News: 200% Penalty for Misuse of Angel Tax Exemption

Akash Dubey

13 Sep, 2022

The provision of Angel Tax is making rounds of news in the startup world ever since its incubation. In recent developments, the government has issued another notification addressing the applicability of Angel Tax. The misuse of Angel Tax Exemption is now under scrutiny of the authorities.

The notification came in the form of an amendment in the Finance Bill for the Finance budget 2019-2020.

The leading news is that the government introduced a clause for a 200% penalty on startups failing to comply with the norms of Angel Tax.

Highlights of the Notification

• Loksabha amended the Finance Bill
• The startups fail to meet the norms will face a 200% penalty
• The bill is in waiting to be passed by the Rajya sabha

Proposal of 200 % Penalty

The government amended the Finance Bill for 2019-2020 and proposed a penalty up to 200 % of Angel Tax for the startups misreporting on the Angel Tax front.

The startups will be liable to pay Angel Tax for startups along with penalty up to 200% if it fails to follow the norms laid by the Department for Promotion of Industry and Internal Trade (DPIIT).

DPIIT is the nodal authority for the promotion and development of internal trade and industry.

The DPIIT notification states the eligibility criteria for exempting Angel Tax. As per it, the startup needs to attest that it had not invested in any unused land, vehicle costing more than 10 lakhs, and jewelry.

The startups who are seeking Angel Tax exemption under Section 56(2) (vii-b) of the Income Tax Act^[1] fall under this ambit.

Additionally, startups are not permitted to lend loans and advances.

A Welcome Move to Good Governance

The government intends to promote a healthy startup growth culture. As per the reports, this move will curb startups misusing the angel tax rule and help genuine startups.

The Finance minister of India Nirmala Sitharaman emphasized startup development in her budget speech. As per the Finance Minister, the growth of startup culture is vital for the Indian Economy.

“All the startups are allowed to receive angel tax exemption regardless of their share premium values given that the aggregate amount of paid-up share capital and share premium of the startup after issue or proposed issue of shares, if any, does not exceed, INR 25 Cr.”

“To resolve the so-called ‘angel tax’ issue, startups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums,”

“The issue of establishing the identity of the investor and source of his funds will be resolved by putting in place a mechanism of e-verification. With this, funds raised by startups will not require any kind of scrutiny from the Income Tax Department,”
  As Quoted by Nirmala Sitharaman

Reason for Amendment in the Finance Bill

Ever since the angel tax came in, there were speculations of its misuse. The ways to abuse of angel tax exemption were cited in form income tax exemption to money laundering acts.

The notification for Angle tax exemptions was made public as on May 27,2019.

The amendment was made to prevent any activity of money laundering or window dressing of books via angel funding route. The government will be able to filter genuine startups that need support from startups misusing these initiatives of the government.

Read our article:541 Startups Get Angel Tax Exemption: DPIIT Secretary