In a major relief to startups and angel investors, government has announced a decision to defer GAAR (i.e. General Anti-Avoidance Rules) by a year.
“It has been proposed in the Finance Bill that any consideration received by a closely held company in excess of the fair market value of its shares would be taxable. Considering the concerns raised by angel investors who invest in start-up companies, I propose to provide an enabling provision in the Income Tax Act for exemption to a notified class of investors.” [Finance minister, Pranab Mukherjee]
The government earlier announced that funding startups could be classified as an income and hence taxable (read coverage of startup tax).
For now, the damage is averted, but ecosystem needs to get prepared when the startup tax ghost haunts back after a year.