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Posted on July 16, 2021
New India redefines its Angel Tax Theory on Start-ups!
Central government’s much talked about Start-up India Initiative has been giving wings to entrepreneurial dreams of thousands of Business graduates all over the country. This is corroborated by the fact that Start-ups in India saw a 108 percent growth in funding in 2018 Vis a Vis 2017.
It all started with PM Modi announcing the Start-Up India initiative in his 2015 Independence Day Speech. Self-employment has been one of the driving factors of the current government’s job creation agenda. However, it has not been a smooth sail for start-ups, with tax disputes around the valuation of investments, popularly known as angel tax, being one of the key concerns. As per a recent Indian Venture Capital Association (IVCA) survey, the income-tax department has sent notices to almost 2,000 start-ups, seeking information/demanding tax on investments received by them on grounds of excessive valuation of shares. The government has taken due cognizance of the hurting issues faced by start-ups and has subsequently issued frequent notifications over the last 4 years to adapt and amend the various factors associated with start-up businesses like definition of start-ups, capital threshold limit for start-ups, and net-worth/income threshold limits for investors to avail the exemptions.
The start-ups campaign has gained much momentum in business circles over the last few
weeks after few favourable measures were notified by the Ministry of Commerce on Feb 19,
2019. Just in case you may have missed these notifications, we are here to bring you upto
speed with the same-
- Start-ups have been exempted from taxation of share premium in excess of fair market
value subject to riders.
- An entity will now be considered as a start-up for up to 10 years after its incorporation as
compared to seven years earlier, provided its turnover for any one financial year has not
exceeded Rs 100 crore.
- A start-up must also be working towards innovation, development or improvement of
products or processes or services, or if it is a scalable business model with a high potential of
employment generation or wealth creation.
- Start-ups can apply for an exemption from angel tax, if their paid-up share capital is up to Rs
25 crore, compared to Rs 10 crore earlier.
- Investments by listed companies with a net worth of Rs 100 crore or turnover of Rs 250
crore in an eligible start-up will be exempt from Section 56 (2), beyond the Rs 25 crore limit.
This relief is expected to encourage wealthy individuals to invest in start-ups that receive capital at a premium due to their innovative business models although the valuation may not be justified by the physical assets they hold. The whole governmental eco-system is working synchronously; towards boosting the Start- ups campaign. The income tax authorities have confirmed the same. Here’s a look how-
- The Tax exemption announcement has already taken effect under the Income Tax Law.
Section 56 (2) of the Income Tax Act — which came to be known as the angel tax
provision — will now not apply to funds received beyond the face value of shares from a
- Indian tax officials have already taken into account the new policy framework and have
confirmed that they won’t press ahead with show-cause notices that have already been
issued, thereby providing relief to enterprises caught up in the angel tax net. All that such
start-ups need to do is submit the latest notification to the tax authorities, as a response.
- Not just that, cases in which assessment proceedings have already been initiated will now be
resolved in line with the new policy.
- The Department for Promotion of Industry and Internal Trade (DPIIT) and the Central Board
of Direct Taxes (CBDT) have confirmed if start-ups are within the exemption framework
notified by the government, they will not need to pay up the already levied taxes.
However, only the start-ups registered with the government’s department for promotion of
industry and internal trade (DPIIT) will be eligible for exemptions. Therefore, to avail any of
the benefits introduced by the government, the start-up needs to submit an upfront
exemption based on a self-declaration, stating that it has fulfilled the conditions for claiming
angel tax exemption.
This declaration includes an undertaking specifying that the start-up shall not invest funds
for a period of seven years in certain specified restricted assets, such as land and building,
shares and securities, motor vehicles, jewellery, archaeological collections, drawings,
paintings, sculptures, any work of art or bullion, etc.
To sum up, it is definitely a welcome move which will go a long way in shaping the New India Start-up dream by easing out the way they do their business.