Context-Finance minister Nirmala Sitharaman said startup registered with the Department for Promotion of Industry and Internal Trade (DPIIT) will be exempt from angel tax, an anti-evasion provision in the income tax act. 

• The angel tax had been in the spotlight in the past with the startup ecosystem calling it an unfair tax burdening the community .

WHAT IS ANGEL TAX?

• Angel tax is a term used to refer to the income tax payable on capital raised by unlisted companies via issue of shares where the share price is seen in excess of the fair market value of the shares sold. The excess realisation is treated as income and taxed accordingly. The tax was introduced in the 2012 Union Budget by then finance minister Pranab Mukherjee to arrest laundering of funds. It has come to be called angel tax since it largely impacts angel invesment in startups

WHY HAS THE INDUSTRY RAISED THE ISSUE OF VALUATION OF STARTUPS? 

• The share issued to an investor has to be valued to decide whether the price is in excess of fair value. The industry has demanded that the discounted cash flow (DCF) method of valuation be used to calculate angel tax instead of the net asset value (NAV) method, though even that may not capture the true value of a startup. The valuation of a startup is usually based on a commercial negotiation between the company and the investor, and is a function of the company’s projected earnings at that point in time. However, since startups operate in a highly uncertain environment, many companies are not always able to perform as per their financial projection. Equally, some companies exceed the projection by a long mile if they are doing well. 

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