The much welcomed ‘Notification’ by the Department of Promotion of Industry and Internal Trade (DPIIT) on 19th February 2019 aims to resuscitate the distressed startup- ecosystem. The Central Government by widening the definition of the start-ups, entitled to ‘angel tax’ exemption, provided a major relief to the several start-ups.
‘Angel Tax’ is the market term used for income tax charged under the head “income from other sources” as per Section 56(2)(viib)( herein after referred as “Provision”) of the Income Tax Act, 1961, introduced via Finance Act, 2012. The objective of introducing section 56(2)(viib) was to discourage the generation and use of unaccounted money done through subscription of shares of a closely held company, at a value which is higher than the Fair Market Value (FMV) of shares of such private company.
This led to a Conundrum where the funds received by start-ups for operation and expansion were regarded as “income” under law, thereby attracting tax liability. The voices of dissent regarding the above mention provision, primarily introduced to curb money-laundering, was depriving them of their hard-earned funds.
The said notification essentially addresses the grievance of the startup community associated with the angel tax.
The major takeaways from the said Notification are:
Any entity incorporated in India as private limited company, or partnership firm or limited liability partnership firm will be entitled to tax exemption for a period of ten years( increased from the earlier period of 7 Years) from the date of incorporation, if:
Its annual turnover in any of the financial years after incorporation does not exceed Rs. 100 crores.
The entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business mode with high scope of employment and wealth generation.
Extending a major relief to startups, the Government allowed a full angel tax concession on investments worth up to Rs 25 crore. Earlier, the concession could only be availed when the total investment (including the angel investment) did not exceed Rs 10 crore.
In order to avail tax exemption, eligible start-ups have to file a self-declaration with the Department for Promotion of Industry and Internal Trade. The DPIIT will pass on these to the tax department. Thereafter the recognized start-ups will get exemption from tax as per sub-clause (ii) of proviso to Section 56(viib).
Investments from non-residents, venture capital companies/funds and frequently traded listed companies with a net worth of Rs 100 crore or turnover of at least Rs 250 crores will be exempt from the Rs.25 crores limit.
Lastly, in order to be eligible for start-up registration, the entity should not have invested in the following assets :
building or land, other than that used by the start-up for its business, or for purposes of renting, or as stock-in-trade in the ordinary course of business.
loans or advances, other than loans or advances made by start-ups whose substantial business is lending of money.
shares and securities.
capital contribution made to other entities.
a motor vehicle, aircraft, yacht, or any other mode of transport, the actual cost of which exceed Rs.10 lakhs, except those held by the start-up as stock-in-trade as part of business for the purposes of plying, hiring, leasing etc.
jewellery, other than that held by the start-up as stock-in-trade in the course of its business.
The Government’s move to abolish angel tax for start-ups are likely to liberate angel investing and unleash the next wave of entrepreneurship in the country, helping India further strengthen its position as a leading startup nation. The new norms are expected to soothe sentiments of both the budding entrepreneurs and the investors in startup ecosystem.
The Indian Lawyer