Founders and venture capitalists are calling for a complete and definitive resolution of the Angel Tax issue.

The controversial "angel tax" originated with the introduction of Section 56(2)(viib) in the Income Tax Act, 1961 on March 16, 2012. This provision was established by the Indian government to prevent the misuse of shell companies and to combat the circulation of black money. The tax applies to capital raised by unlisted companies when the value of issued shares surpasses their fair market value (FMV).

Despite over 52 notifications and clarifications from various bodies under the DPIIT, Ministry of Commerce and Industry, and the Ministry of Finance, the issue remains unresolved. DPIIT Secretary Rajesh Singh mentioned that the DPIIT has repeatedly recommended removing the angel tax for startups.

Siddarth Pai, founding partner, CFO, and ESG officer of 3one4 Capital, stated that the exemption criteria outlined in the DPIIT circular from February 19, 2019, are highly restrictive for startups. The restrictions prevent startups from engaging in typical business activities such as creating ESOP trusts, subsidiaries, or joint ventures. These rules impose a 17-year limitation (10 years as a startup plus 7 years post-fundraising) on startups from pursuing such transactions due to a potential 200% penalty for violations. Despite feedback given since 2019, no changes have been made.

So far, only about 9,000 out of over 1.5 lakh DPIIT-registered startups have received exemptions from the angel tax. Sandiip Bhammer, founder and co-managing partner of Green Frontier Capital, emphasized the need for a more comprehensive exemption framework for all DPIIT-registered startups. A clearer and more streamlined exemption process would help reduce administrative burdens and uncertainty for startup founders.