Govt relaxes angel tax norms for startups, increases investment limit to Rs 25 crore for availing income tax concessions

Giving major relief to budding entrepreneurs, the government Tuesday relaxed the definition of startups, and allowed them to avail full angel tax concession on investments worth up to Rs 25 crore. Earlier, a startup was allowed to avail tax concession only if total investment, including funding from angel investors, did not exceed Rs 10 crore. “Considerations of shares received by eligible startups for shares issued or proposed to be issued by all investors shall be exempt up to an aggregate limit of Rs 25 crore,” Commerce and Industry Minister Suresh Prabhu said in a series of tweets.

Investments into eligible Startups by Non-Residents, Alternate Investment Funds- Category I registered with SEBI shall also be exempt under Section 56(2)(viib) of Income Tax Act beyond the limit of Rs 25 crores. #AngelTax #StartUp

— Suresh Prabhu (@sureshpprabhu) February 19, 2019

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The development assumes significance as several startups have claimed to receive angel tax notices, impacting their businesses. Various startups have raised concerns on notices sent to them under section 56(2)(viib) of Income Tax Act, 1961, to pay taxes on angel funds received by them. The minister said that a notification regarding simplifying the process for startups to get exemptions on investments under section 56(2)(viib) of Income Tax Act will be issued on Tuesday by the Department for Promotion of Industry and Internal Trade (DPIIT). To provide these tax concessions, the department has relaxed the definition of startups. Now “an entity shall be considered as startup if its turnover for any of the financial year, since its incorporation or registration, has not exceeded Rs 100 crore instead of the existing Rs 25 crore,” he said. Besides, investments by listed companies with a net worth of Rs 100 crore or turnover of Rs 250 crore into an eligible startup would also be exempted from the Section 56(2)(viib), beyond the Rs 25 crore limit. “Considerations of shares received by eligible startups for shares issued or proposed to be issued by all investors shall be exempt up to an aggregate limit of Rs 25 crore,” he added. [caption id=“attachment_3049362” align=“alignleft” width=“380”] Representational image Thinkstock.[/caption] Also, investments into eligible startups by non-residents, alternate investment funds - category I - shall also be exempt under this section beyond the limit of Rs 25 crores. Further, an entrepreneur will also be eligible for exemption if it is a private limited company recognised by the DPIIT, and is not investing in specified asset classes. However, for being eligible for exemption under Section 56(2)(viib), a startup should not be investing in immovable property, transport vehicles above Rs 10 Lakh, loans and advances, capital contribution to other entities and some other assets except in the ordinary course of its business. To avail these concessions, eligible startups will only have to file a duly signed self-declaration with the DPIIT for availing exemption. The department would then transmit these declarations to Central Board of Direct Taxes (CBDT). Further, there is no requirement of making any application for exemption under this section and there will be no case-to-case examination of startups. The valuation of shares is also no more a criterion for exemption of investments into eligible startups under Section 56 of Income Tax Act. Section 56(2)(viib) of the Income Tax Act provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent. Touted as an anti-abuse measure, this section was introduced in 2012. It is dubbed as angel tax due to its impact on investments made by angel investors in startup ventures. Commenting on the move, Padmaja Ruparel, Co-Founder, Indian Angel Network (IAN), said this will unshackle angel investing and bring in domestic monies for startups. Sachin Taparia, Founder of LocalCircles said that this would eliminate a major obstacle for startups. S Vasudevan, Partner, Lakshmikumaran & Sridharan Attorneys said the stated exemptions may provide much-needed relief to the relatively larger-sized start-ups (having turnover up to Rs 100 crore instead of earlier threshold Rs.25 crore) who may have been required to pay tax on premiums received on share subscription. “However, many of these reliefs will require amendments in the Income-tax Act, 1961 and the start-ups may have to wait till that time to avail these benefits. It is to be noted that no relief is proposed in respect of section 68 of the Income-tax Act, 1961. So the start-ups will continue to carry the onus to establish the genuineness of the source of the investment made by the investors failing which the sums received on share application can be taxed by the department.”