The government in February relaxed the definition of start-ups to encourage budding entrepreneurs

The government is likely to maintain a status quo on angel tax for start-ups in the Union Budget to be presented on July 5, according to sources. The issues were taken care of in February this year, they added. It indicates no change in Section 68 of the Income Tax Act, 1961, under which any unexplained funding raised by a start-up can be held as income and taxable. Many start-ups, including those from the software industry, are seeking exemption from Section 68 of the Income Tax Act.

If a privately held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value is taxable as income from other sources under Section 56 (2) (vii)(b) of the I-T Act.

Section 56 (2) (viib) of the Act has come to be known as angel tax as wealthy individuals or angel investors putting their capital in start-ups face scrutiny. About 100 start-ups have been issued tax demand notices under the section.

To encourage budding entrepreneurs, the government in February relaxed the definition of start-ups and made companies with sales up to Rs 100 crore (earlier the exemption limit was Rs 25 crore) eligible for the angel tax relief.

According to the revised CBDT norms, an entity could be considered a start-up for up to 10 years from the date of incorporation, up from the earlier seven years.

The relief from angel tax is now available to all eligible start-ups retrospectively, and some 342 start-ups have got an exemption since February.

However, at a pre-budget meeting with the Finance Ministry recently, start-ups from the software and internet sector said though the government considered Section 56 (2) of the Income Tax Act in February, notices had been served to them under the section.