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News:

The government to setup an expert committee to look into all the taxation issues being faced by startups and angel investors.

Important Facts:

The move comes after Income Tax Department issued notices to over 150 startups over the last few weeks asking them to clear taxes on their angel funding, which in some cases were nearly 40 percent of the fundraise
Central Board of Direct Tax recognizes that startups are going to bring a lot of innovation to the country and, therefore, no coercive action related to tax demands would be made till the time an expert panel resolved the issue of taxing startups.
The 2012 budget speech prefaced the introduction of angel tax to curb the laundering of black money through private limited companies.

Background of Angel Tax:

In May 2018, The tax department exempted angel investors from income tax on their investments in startups.
The decision to give investors in start-ups exemption from income tax was aimed at addressing a key issue faced by angel investors who put money during early growth stage, and would also provide level-playing field for all investors.
According to the notification, an angel investor with a minimum net worth of Rs 2 crore or an average returned income of over Rs 25 lakh in the preceding three financial years would be eligible for 100 per cent tax exemption on investments made into startups above fair market value.
However, recently several startups had raised concerns over taxation of angel funds under Section 56 of the Income Tax Act, which provides for taxation of funds received by an entity.

Function of Expert Committee

The committee will make suggestions for recognition of startups under the “Start Up India” programme and premium paid by investors while investing in such companies.
The committee will make recommendations on individual cases of recognised startups to the DIPP on issues pertaining to tax exemptions for such ventures.
Committee will make recommendations on individual cases of recognised startups to the DIPP on issues pertaining to tax exemptions for such ventures.
Members of angel networks expressed fears that this could kill the startup ecosystem. Industry leaders and startup founders.